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Are Fever-Tree shares at fever-pitch?

12 October 2017

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Fever-Tree has delivered some very impressive results since listing. Revenues have jumped from £34.7m in 2014 to £102.24m in 2016, and are expected to top £150m this year. Meanwhile earnings per share have increased 10 fold to 23.7p.

Performance has been driven by the surge in popularity of gin and tonic, although some might argue the emergence of Fever-Tree has itself been the catalyst for the gin boom. Either way UK gin sales rose 16% in 2016, and as the leading provider of premium tonics, Fever-Tree’s results have sparkled.

Having enjoyed spectacular success in the UK, the group is now looking to spread the G&T gospel far and wide. Management’s policy of outsourcing bottling means expansion shouldn’t require too much capital expenditure, and additional sales quickly translate to profits. The UK continues to account for almost 50% of sales, but continental Europe and the US are increasingly important, with revenue growth of 31% and 18% in the first half of the year.

Fever-Tree share price and charts

However, a dependence on tonic has led to concern among some investors. The drinks market is notoriously faddish, and G&T might not enjoy its current popularity forever. Fever-Tree has responded with new mixers specifically targeting dark spirits. These include cola and ginger beer – which is delivering promising results as the popularity of the Moscow Mule grows – but remains a small part of overall sales.

New markets and a broader product portfolio are expected to deliver compound sales growth of around 26% a year out to 2019. This is slower than previously, but impressive nevertheless.

This growth potential, and a track record of outperforming even historically lofty expectations, means the shares trade on a punchy 58.7 times next year’s expected earnings. That may be justified if the company delivers on expectations. But it is well above Fever-Tree’s average rating since listing and should performance fall short, the share price is likely to react sharply.

Past performance is not a guide to future returns. Source: Thomson Reuters Eikon, 10/10/17

Fortunately, for those who find Fevertree’s rating a little too much to stomach, the UK stock market offers a surprising number of alternatives.

AG Barr – Scotland’s favourite drink, barr one

If the criticism of Fever-Tree is it’s a bit of a one trick pony, the same could be said of AG Barr. Although its drinks portfolio ranges from Rubicon fruit drinks to Tizer, by the far the most important is Irn-Bru.

The luminous orange drink is famous as one of a tiny number of soft drinks that has managed to deny Coca-Cola top spot in its home market. On sale since 1901 and often referred to as ‘Scotland’s other national drink’, a combination of unique flavour and cheeky marketing means Irn-Bru continues to grow.

Famously sugary, there were fears the recently introduced sugar tax would weigh on Irn-Bru sales. However, customers have remained loyal, with the new zero sugar version Irn-Bru XTRA selling 20 million cans in its first six months.

The Barr family remain heavily involved in the business. Former Chairman Robin Barr is a non-executive director and, collectively, the family own around 19% of the company. Perhaps the best indication of the family’s ongoing involvement in the business is that of the three individuals reported to know the top secret Irn-Bru recipe, two are Barrs.

We tend to favour companies with significant family ownership, because the desire to pass the business onto the next generation means the board is focused on the long term. That might explain why AG Barr is debt free and has grown or held the dividend every year since the late 90s. AG Barr is expected to yield 2.6% in 2018, although as ever this should not be seen as a reliable indicator of future income, and past trends may not continue.

Past performance is not a guide to future returns. Source: Thomson Reuters Eikon, 10/10/17

For all its attractions, AG Barr lacks the stellar growth potential of Fever-Tree (with revenues up just 8.7% so far this year). That is reflected in its lower valuation, with a price earnings ratio of 20 times, still some way above the company’s longer-term average.

AG Barr share price and charts

Britvic – A healthy focus on well-being

For something a little different in the soft drinks space, investors might want to take a look at Britvic.

The company is best known for its Robinsons brand - thanks in no small part to a partnership with Wimbledon that’s among the oldest sports sponsorship deals in the world. But it also generates a significant portion of revenues from its role as distributor for Pepsi in the UK & Ireland, contracts that are due for renewal in mid-2020s.

Outside the Pepsi partnership, Britvic has a far greater focus on still products than rivals, with Fruit Shoots, J20 as well as French syrup brands all contributing significantly to sales. That’s given it an advantage when catering to increasingly health-conscious consumers. Even in more conventional soft drinks Britvic has looked ahead of the curve, with Pepsi MAX leading all Pepsi marketing in the UK since 2005.

Although the French business has long been a leader in syrups, Britivic has recently turned its eye further afield. The Fruit Shoots product is cropping up around the world, with early signs of success. The relationship with Pepsi has helped drive sales growth in the US, while the acquisition of squash manufacturer Ebba in 2015 means Brazil now accounts for 9% of revenue.

Past performance is not a guide to future returns. Source: Britvic, 10/10/17

Britvic has had its ups and downs since listing, and recent times have seen debt climb following investment in future capacity. At 14.6 times next year’s earnings, Britvic trades on the lowest price/earnings ratio of the major UK drinks businesses.

That valuation might reflect its dependence on the Pepsi contract – which looks highly likely, but not guaranteed, to be renewed – as well as a significant amount of debt. However, it’s worth bearing in mind the group has been able to grow the dividend steadily, and now offers a yield of 3.5% - although this should not be seen as a reliable indicator of future returns.

If Britvic’s international expansion succeeds, and can continue to play on its health credentials, revenue streams should diversify nicely, leaving the company well-placed to reduce debt while rewarding shareholders in the years to come.

Britvic share price and charts

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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