The soft drinks market is facing some serious headwinds this year, as accepted by Britvic this week and by its old sparring partner AG Barr yesterday.
The first, plainly, is consumer spending and confidence, if inflation rises. Soft drinks are not exactly huge outlays, but there will be an effect. The second is the rise in the cost of ingredients — because of increases on global markets and more expensive imports thanks to the lower pound — applying to anything from sugar through to plastic and metal packaging. A third factor is the government’s soft drinks levy to limit sugar consumption, although this does not kick in until next year.
Barr was indicating yesterday how it intends to face up to all these. With regard to the levy, by then about two thirds of its product will not contain sufficient sugar to attract it. There is not much the company can do about consumer spending except talk to customers about pricing and promotions. As for rising costs, Barr has just completed a reorganisation that will take about £3 million out each year. This gives the company confidence that it can meet profit expectations for the year to January 31 at least, with the market expecting a slight increase in pre-tax profits to a little above £42 million.
This, at least, is heading in the right direction, as are the numbers in the year-end trading update. Barr enjoyed a noticeably better second half, with like-for-like sales in the year up 1.5 per cent. This suggests that the 4 per cent decline in the first half was more than reversed in the second, while the rise for the year was ahead of the market.
This was helped by a couple of new zero-sugar products derived from its Irn-Bru and Rubicon brands. The company is also continuing to invest, putting in a £10 million production line at its Milton Keynes site. The facility was opened about three years ago as part of a drive to expand outside its Scottish base.
Barr is effectively debt-free, which will allow more acquisitions such as the Funkin brand, the most recent. The shares, up 8p at 510p, sell on 18 times earnings.
Barr is doing all it can, but this does not feel like the time to be investing in UK consumer goods.
My advice Avoid
Why AG Barr is doing all it can to temper headwinds in its markets, but this year looks likely to be largely flat, given those pressures
32red
Shares in the various gaming companies have been held back by concerns about impending regulatory crackdowns on fixed-odds betting terminals and on the marketing of their services. The first will not affect 32Red, which is entirely online and mainly offers casino betting; nor should the second be a concern, as its own ads are shown after the watershed.
The latest trading update, with net gaming revenues at the core business up 18 per cent, disguises a poorer second half, a 10 per cent rise against a 32 per cent increase in the first. The company was competing with the Olympics and the Euro 2016 football and was up against a tough comparator last time. Margins were also down because of a higher proportion of winners among its bigger customers — merely the luck of the draw.
The growth is coming from the 2015 acquisition of the Roxy Palace business and operational improvements that will mean sharply higher profits this year, aided by an Italian operation that is in profit at last. The shares, up 5¾p at 139p, sell on nine times earnings, which looks like good value for a business with strong growth prospects.
My advice Buy
Why Shares have been held back for no good reason
Assura
There are a number of parallels between Assura and Primary Health Properties, a company featured here regularly as a reliable income stock. Both invest at an early stage in NHS properties, renting them back to doctors, and health practitioners, so providing a rental income guaranteed by the state. Both are growing fast, adding to their portfolios. Both recycle much of these earnings as dividends, and both offer a yield of 4.8 per cent.
The main differences are that Assura, which is slightly the larger, sometimes invests at an earlier stage, overseeing construction and talking to the eventual residents about their needs. The company is probably growing a bit faster, too. It has almost doubled in size over the past three years and expects to build or acquire about £175m worth of properties in the financial year to the end of March, to add to the 385 already owned.
Assura has the funds to pay for this, £130 million of undrawn facilities, and has issued a £100 million loan note to tap the US market for the first time. The NHS has ambitious plans to build new facilities, with the intention of moving some services away from hospitals to local centres, though this, as ever, is taking time to happen. Assura’s rent roll grew by £2.6 million a year to £72.7 million in the third quarter, mainly driven by acquisitions, although it now has six sites being built on.
The shares have been weak of late, along with other yield stocks, but added 2p to 54p. That assured yield makes them a useful addition to PHP for retail investors.
My advice Hold
Why Assura offers a good, reliable income stream
And finally . . .
Telford Homes continues to do what it does, winkle out unconsidered properties in less expensive parts of London that can be converted into much-needed homes. The company has agreed to pay £30.2 million for a disused London Electricity Board building in Bethnal Green.
This will become homes and some commercial space once work on the site completes in 2021. It will then have an expected value of £95 million. The company has always said that such sites are still available. The shares gained 6¼p to close at 337p.
