There are plenty of people — fretting about their jobs, incomes, families, health and myriad other worries — who might be reaching for a drink at the moment. Back in January, before the advent of the Covid-19 pandemic, Tempus was, in suitable moderation, doing something similar, recommending that investors hold on to their shares in C&C Group.
There was a caveat, though: the drinks maker might be affected if people began to watch their pennies more closely as Brexit loomed. Well, Brexit is still months away, but the coronavirus outbreak has delivered an even bigger shock to the system. Every company, C&C included, is having to review its operations and future planning.
Prior to the pandemic, C&C was doing well. Results for the 12 months to the end of February, which were published yesterday, show signs of solid progress, particularly against tough comparable figures from the warm summer of 2018. The €1.7 billion in revenue was what analysts had forecast, alongside improved margins and a 10.4 per cent increase in underlying operating profit to €116.4 million. Its rescue of the Matthew Clark and Bibendum wholesale businesses two years ago appears to be paying off, while the core Tennent’s, Bulmers and Magners brands performed steadily.
C&C traces its roots to a 19th-century soft drinks retailer in Belfast and now has its headquarters in Dublin. It makes and supplies drinks — from beers and ciders to wines, spirts and soft drinks — to dozens of countries, although the bulk of its sales are in Britain and Ireland. It has a 47 per cent stake in Admiral Taverns, the pub operator. Stephen Glancey, 59, stood down as C&C’s chief executive in January and the group remains on the hunt for a replacement. Stewart Gilliland, 63, its chairman, said yesterday that there is a “very short list” of potential candidates, but declined to specify when a new chief would be installed.
Since the results, though, and with about three quarters of sales into the on-trade, the company has been hit badly by the closure of pubs, restaurants and hotels. C&C is burning through about €7 million of cash a month while the on-trade remains shuttered. Total Bulmers cider volumes were down by 16 per cent in April and May, Tennent’s lager fell by 42 per cent in Scotland and Magners cider dropped 7 per cent in the UK. There was, however, a rise in sales to the off-trade as people drank more at home.
C&C is working with its pub customers, including building a mobile app for them to order and pay via their phones and creating hygiene products. The group has taken steps to preserve cash, including the cancellation of its full-year dividend, reducing capital spending, trimming salaries and putting about 70 per cent of its staff on furlough. Mr Gilliland said that C&C had significant liquidity, with €550 million available.
Analysts at Barclays said that C&C’s actions should enable it to emerge “in a comparatively strong position versus peers” after Covid-19. Brokers at Davy, the stockbroker, have modelled a worst-case scenario of a loss of between €20 million and €30 million for this financial year.
Patrick McMahon, head of investor relations at C&C, confirmed that the company may look at deals, and said: “We don’t exactly know how the landscape is going to look. Our acquisition strategy has been opportunistic in the past and where we see value we will invest.”
C&C’s shares began the year at more than 400p, but fell below 150p on March 23 when lockdown was imposed. They rose 8¼p, or 4.2 per cent, to 206½p last night.
ADVICE Sell
WHY There is room for further improvement in the share price but there is too much uncertainty around what the short term looks like
Zoom Video Communications
“You just delivered one of, if not the greatest all-time quarters in enterprise software history.” This was the opening gambit of one analyst on Tuesday night’s earnings call with executives from Zoom Video Communications (James Dean writes).
High praise, but perhaps justified, given the performance of the video-conferencing service. Investors who bought into Zoom’s float in April 2019 are sitting pretty on a gain of more than 500 per cent.
Zoom’s popularity exploded in no small part because its basic service is free, user-friendly and (generally) reliable. Free internet services do not make money, though, and Zoom’s is not supported by advertising. The company relies on corporate subscriptions for its revenue. In the United States, these start at $14.99 a month for small businesses and rise to more than $1,999 a month for big ones.
Zoom said on Tuesday that as many as 300 million free users and paying subscribers were using its services in April, compared with ten million at the end of December — an impressive rise. Does this justify Zoom’s $60 billion price tag? If cold numbers are the only defining factor, the answer is “no”. Zoom’s profit for the three months to April was $27 million on revenue of $328 million — a significant improvement on last year’s $200,000 profit and $122 million revenue, but rather insignificant for a company with such a sizeable valuation.
However, the financials are a small part of the picture (although the fact that Zoom is turning a profit at this point sets it apart from other technology growth stocks). The bet is really about the market.
At the start of the year, Zoom investors probably had one eye on a takeover by a larger rival. Now, with the stock price having tripled since then, the company is probably too expensive to buy. Instead, investors are betting that Zoom will be the leader in a video conferencing market that will continue to grow.
Yet even if Zoom is a worthy bet on the market, it is expensive, as its shares trade at about 34 times this year’s expected revenue. Slack, the workplace communications company, trades at about 20 times revenue. This was probably the one to have got into earlier.
ADVICE Hold
WHY Zoom has impressed but its stock is very expensive
