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AG Barr - Strong sales, new Irn-Bru recipe starting well

Nicholas Hyett | 1 February 2018 | A A A
AG Barr - Strong sales, new Irn-Bru recipe starting well

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Barr (A.G.) Ord 4 1/6 pence

Sell: 522.00 | Buy: 527.00 | Change -3.00 (-0.57%)
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AG Barr expects to deliver revenues of around £277m for the full year, a 7.5% improvement on 2016 and marginally ahead of expectations. Profits are expected to be in line with previous expectations.

The shares rose 2.5% in early trading.

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Our View

AG Barr's brands range from Rubicon to Tizer. But the luminous orange Irn-Bru is by far the most important.

The Glaswegian tonic 'made from girders' is one of a tiny number of soft drinks to have denied Coca-Cola top spot in its home market. On sale since 1901, a combination of unique flavour and irreverent marketing means Irn-Bru continues to grow.

Famously sugary, there are fears the new sugar tax due to be introduced in April, and increasingly health conscious consumers will weigh on Irn-Bru sales.

The new, lower sugar, recipe was only launched in January, and while early signs are said to be encouraging it's still early days. However, we're encouraged by recently launched zero sugar version, which sold the equivalent of 20 million cans in its first six months. It looks like customers will stay loyal.

The Barr family remain heavily involved in the business. Former Chairman Robin Barr is a non-executive director, and collectively the family control 18% of the company. Perhaps the best evidence of the family's ongoing involvement is that of the three individuals who know the top secret Irn-Bru recipe, two bear the Barr name.

We tend to favour companies with significant family ownership. The desire to pass the business on to the next generation means the board focuses 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 offers a prospective yield 2.5% in 2018/19, although as ever this is not a reliable indicator of future income, and past trends may not continue.

AG Barr lacks the stellar growth potential of a company like Fevertree. Nonetheless, sales are still well head of the market so far this year, and the group trades on a price to earnings ratio only 9% above its long-term average.

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Full Year Trading Update

AG Barr has continued to gain market share in the year. Data suggests that in value terms the UK soft drinks market grew by 2.7% in the 48 weeks to the end of December, with volumes broadly flat.

The group describes the consumer response to its new Irn-Bru formulation, introduced in January, as encouraging. 99% of the AG Barr portfolio is now expected to contain less than 5g of sugar per 100ml before the implementation of the soft drinks sugar tax in April of this year.

Management expect economic uncertainty, increased regulation and changing consumer dynamics to create challenges in the coming year. However, the group remains confident that it can "capitalise on opportunities to grow [the] business and deliver long-term value to shareholders."

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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.

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 for more information.