Fevertree is determined not to let coronavirus steal its fizz. Although the pandemic will do some material damage to sales and trading this year because of the forced closures of pubs, bars and restaurants across continents, the maker of upmarket mixers is convinced that the diversity of its revenues will see it through. To help it further, it has a low-cost operating model and no debts; in fact, there was £128.3 million of cash on the balance sheet at the end of last year.
The company certainly seems to have its investors on its side. Having tumbled to a low of 892¼p at a nadir in late-March, the shares have since bounced back and are down 14 per cent since the beginning of the year, better than the index of the top 50 Aim shares in which the stock sits.
Fevertree, founded in west London in 2004, sells a range of mixers from tonic water to ginger beer both directly to consumers and to the trade in more than 70 countries. Listed in 2014 on Aim, London’s junior stock market, at 134p a share, its price touched a high of £39.56 in September 2018. Against the backdrop of weak consumer confidence and a recent sales wobble in its main British market, the shares have fallen back since then and this afternoon were a further 39½p, or 2.1 per cent off at £18.01½. Unlike some other racy growth stocks, Fevertree pays a dividend, albeit a very modest one.
There were signs of pressure in Fevertree’s core domestic market late last year, when it downgraded its forecasts in an unexpected trading update in November. Having initially forecast UK revenues to increase by 7 per cent last year, it pared that back to 2 per cent and eventually reported a decline of 1 per cent.
Fevertree has maintained all along that it’s not that its customers are losing their taste for its tonics, more that the wider drop in consumer confidence is tempering their appetite for paying that bit more.
Standing back, it seems clear that, however the unwinding of lockdowns across the world plays out, this year’s sales will be down sharply. Supplying trade customers in the leisure industries accounted for about 45 per cent of Fevertree’s £260.5 million of revenues last year. It seems a fair working assumption that for about three months of this year, sales to the trade will be near to zero, then will run at lower rates as enforced social distancing measures reduce turnover in many restaurants and bars. Assessed crudely, that could easily result in lost sales of more than £30 million. Some of that will be balanced by higher sales to consumers, which Fevertree has said were very strong in the early weeks of the lockdown and have remained healthy.
Is that enough to jeopardise the business model? Not really. Assuming that Fevertree is right about the continuing thirst for its mixers, sales to trade customers should pick up again quickly when outlets reopen, regaining their more normal growth levels over time as social distancing measures are relaxed.
Sales to consumers should hold up, even if the group has to rely more heavily on its rapidly growing international divisions, each of which has been turning in double-digit revenues growth and where together sales are almost as high as they are in Britain. Fevertree should be shielded in the months ahead by its relatively low costs. It employs only 170 staff worldwide and contracts out the bottling and canning process so that it can easily control production volumes.
Despite their recent weakness, the shares remain expensive, trading for 42.3 times HSBC’s forecast earnings for a dividend yield of a mere 0.9 per cent. For investors who believe in the model, the rating is justified.
ADVICE Buy
WHY Expensive but attractively resilient low-cost operating model and very strong growth potential
Lok’n Store
Lok’n Store is the relative minnow in the market for self-storage, but this Aim-listed company is — steadily and conspicuously — growing.
Effectively founded in 1995, when it opened its first storage outlet in Horsham, West Sussex, it operates 34 facilities in southern England serving roughly 10,000 customers, comprising individuals and businesses. The company typically expands at a run rate of about four new stores a year, but recently has stepped up its pipeline of new openings from eleven to sixteen, which, when completed, will increase its available space by about 36 per cent to more than 2.26 million sq ft.
It owns the freehold to fifteen of its storage facilities and is the leaseholder on eight. For the remainder, it is the manager of sites owned by third-party investors, an approach that reduces costs and borrowings and sharply increases the return. Lok’n Store’s preadjusted profit margin on the stores it manages is 100 per cent, compared with 55.8 per cent from its wider estate.
Results for the six months to the end of January, published this week, showed solid growth in revenues, profits, the dividend and the net value of its assets over the period. Gearing is low and operating costs are both manageable and flexible.
Self-storage facilities are deemed essential, so all of Lok’n Store’s units have remained open during the lockdown, with social distancing in place. So far, it seems trading has been strong. Year-on-year revenues in March were up by 8.5 per cent.
This is an attractive market for investors and one undersupplied for consumers. The pressures on space and the increase in rental living suggest there is inbuilt structural growth in this area over time.
While Lok’n Store is small relative to heavyweight players such as Big Yellow and Safestore, its measured approach to expansion makes it feel resilient. The shares, flat at 580p yesterday, were hit hard by the onset of Covid-19, but a recent recovery has recouped some of the lost value. At 50 times Finncap’s forecast earnings for a dividend yield of 2.2 per cent, they look expensive but are worth owning.
ADVICE Hold
WHY Attractive market with much potential but the shares don’t come cheap
