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Fevertree - UK growth slows, but on track for full year targets

Nicholas Hyett | 23 July 2019 | A A A
Fevertree - UK growth slows, but on track for full year targets

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Fevertree Drinks plc Ordinary 0.25p

Sell: 2,508.00 | Buy: 2,512.00 | Change 6.00 (0.24%)
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Underlying revenues rose 12% to £117.3m, with adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) increasing 7% to £36.7m.

However, the group warned growth in the key UK market is slowing, with poor weather in the period dampening sales.

The interim dividend of 5.2p is 23% ahead of last year.

The shares fell 3.3% following the announcement.

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Our view

UK drinking habits have changed - we're opting for long drinks rather than just wine and beer for post-work and weekend tipples. Artisan spirit drinkers are happy to pay a bit more for Fevertree's higher end accompaniment.

Sales growth has been impressive - increasing from £59m in 2015 to £237m last year. Its huge popularity has been reflected in the share price too - it's around 12.8 times higher than when the company first listed in 2014.

But sales growth alone doesn't make a business. What stands out about Fevertree is its operating model. The group outsources most of its operations - think suppliers, bottlers and distributors, and that gives the group flexibility and makes expansion cheaper. A lean operating model means profits drop straight through to cash. That can then be returned to shareholders or reinvested to fund growth.

Unusually for a fast growing company, Fevertree offers a dividend. A prospective yield of 0.8% might not be huge, but has the potential to grow if all goes well.

But problems are bubbling to the surface. UK growth has started to falter, as the group's started to brush up against the edges of the tank. Even with the gin boom and Fevertree marketing machine, there's a limit to how much premium tonic you can sell.

That puts extra pressure on Fevertree's international divisions. The market with the most untapped potential is the USA, where a trend towards more premium drinking habits is allegedly starting to catch on. Unfortunately that's geared towards dark spirits like Whiskey and Rum, which puts Fevertree's ginger ales and colas centre stage- and the competitive landscape there is crowded. After all, consumers order a rum and coke, not a rum and cola.

The shares currently trade on 36.2 times expected earnings. That's lower than it has been in the past, but still well above the market average. It's impossible not to be impressed by Fevertree's growth to date, but in order to justify that rating, we think Fevertree needs to see a taste for tonic take off stateside. There's little evidence of that yet.

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Full year trading update

In the UK, revenues rose 5% to £60.7m, as last year's exceptional weather provided a tough comparator and growth slowed across the premium-mixer category. The group enjoyed strong growth in bars and restaurants, and now has a 45% share of that market, while also launching its first 'ready to drink' products during the half.

Sales in the USA increased 24%, at constant exchange rates. Revenue of £19.8m comes as new distribution partnerships performed well, and a trend towards more premium mixers in the region gains traction.

Underlying European revenue increased 14% on a constant currency basis, with further acceleration expected in the second half of the year. Within Rest of the World, the group delivered sales growth of 49%. Australia and Canada performed particularly well, and Fevertree sees potential in Asia in the medium to longer term.

Continued investment in marketing and staff costs, particularly in the USA and Europe, meant EBITDA margins dropped from 32.6% to 31.3%.

The group held cash of £104.1m in the period (2018: £62.5m).

Looking ahead, the group said it remains "mindful of the tough comparators over the remainder of the summer in the UK" but "the Board anticipates that the outcome for the full year will be in line with its expectations."

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