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AG Barr - higher prices driving revenues, but uncertainty lingers

Nicholas Hyett | 25 January 2019 | A A A
AG Barr - higher prices driving revenues, but uncertainty lingers

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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.

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

Sell: 527.00 | Buy: 529.00 | Change -1.00 (-0.19%)
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AG Barr expects to deliver revenues of around £277m for the full year, a 5% improvement on 2017. Profits are expected to be in line with previous expectations.

The shares were broadly unchanged in early trading.

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Our view

A.G. 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 the 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 have been fears that increasingly health conscious consumers and the new sugar tax introduced in April, would weigh on IRN-BRU sales.

A new, lower sugar, recipe was launched last January, and the initial reception to the reformulated recipe and the zero sugar alternative, IRN-BRU XTRA, has been positive. Sales in England and Wales have been particularly strong as AG Barr looks to grow the brand outside its traditional home market.

It looks like customers will stay loyal, but Barr's taking no chances. The group is increasing its spend on marketing and innovation. While that will likely impact operating margins in the medium-term, we think it's the right decision. We're at an important juncture after all.

The Barr family remain heavily involved in the business. Collectively, the family control around 20% of the company, while two of the three individuals who know the top secret IRN-BRU recipe 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 adopts a sensible and sustainable approach to future growth.

While the group lacks the stellar growth potential of rivals like Fevertree, we think there's no reason it can't keep steadily accumulating market share. Bear in mind though that the shares currently trade on 23.6 times expected earnings, which is higher than it's been in the past and compared to most rivals.

The fact remains though, AG Barr is a good company. The group is debt free and has grown or held the dividend every year since the late 90s. The shares offer a prospective yield 2.1%, although as ever investors should remember that past trends may not continue.

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Full Year Trading Update

The group continued to take more market share during the year. The wider industry in the 48 weeks to 30 December 2018, saw a 3% increase in volumes, while value increased 8% as the sugar tax boosted prices across the industry.

The group has taken the opportunity to increase volumes, and increase market share. However it expects to return to a more price-led trading strategy in 2019.

Investment in brands, assets and people means operating margins are expected to be slightly lower than last year.

The £30m share buyback has continued and is due to complete in 2019, although this is slightly later than previously indicated.

Looking ahead, the group said "the current political and economic uncertainty in the UK looks set to continue. For the soft drinks industry, further regulatory intervention is on the horizon and consumer dynamics continue to evolve."

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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. 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 for more information.