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AG Barr - on track to meet revised full year expectations

Nicholas Hyett | 24 September 2019 | A A A
AG Barr - on track to meet revised full year expectations

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

Sell: 470.00 | Buy: 471.00 | Change -6.50 (-1.37%)
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Total revenue fell 10.5% in the first half to £122.5m, with pre-tax profit down from £18.2m to £13.5m. That reflects lower sales, as the group increases prices, and challenges within Rockstar Energy and Rubicon juice drinks.

However, the group remains confident it can meet revised expectations, laid out in July's trading statement.

An interim dividend of 4p has been announced - 2.6% ahead of last year.

The shares rose 9.4% following the announcement.

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Our view

AG Barr kept prices low following the introduction of the Sugar Tax last year, but moving back to a more normal pricing structure has proved painful. Add challenging market conditions and some problems with the Rockstar and Rubicon brands, and it's been a difficult first half.

The shares fell over 20% in July when it warned full year profits would be around 20% lower than 2018. That reflects lower sales as well as a very strong 2018 making for a tough comparison. The news was a major shock - consumer goods companies like AG Barr are supposed to be reliable compounders, with sales that turn up come rain or shine.

Fortunately the ship has steadied. There are early signs that customers are coming round to the idea of higher prices, with those inflated price tags offsetting industry-wide volume declines. That's a big step in the right direction.

We're particularly relieved to hear good things about the most recent extensions to the IRN-BRU brand. 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.

The Barr family remain heavily involved in the business too. Collectively, the family control over 22% of the company, while two of the three individuals who know the top secret IRN-BRU recipe bear the Barr name.

The desire to pass the business on to the next generation means the board adopts a sensible and sustainable approach to future growth. That probably goes some way towards explaining the balance sheet's conservative net cash position. That should serve the group well in tough times.

The hard work isn't over yet - there's pressure for new products, as well as the improved pricing structure to yield strong results but at least things have stabilised. The group's maintained its excellent record on dividend growth, and currently offers a prospective yield is 2.9% - although remember that even the best track record is no guarantee of future success.

The shares currently change hands for 21 times expected earnings, a bit above the ten year average of 19.4.

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Half Year Results

Across the half, the UK soft drinks market saw volumes decline 4.1% year-on-year. AG Barr didn't escape unscathed, but customers are reported to be increasingly accepting of the new pricing levels with early signs that higher prices are offsetting lower volumes.

Initial responses to the new IRN-BRU Energy range has been favourable in Scotland, with roll-out to the rest of the UK due later in the year. AG Barr is also planning to launch three new Rockstar products in the Autumn, in response to the brand challenges in the portfolio earlier this year.

Funkin performed strongly, with ready to serve nitro cocktails exceeding expectations, and a number of significant listings secured across a range of channels, including travel operators and large multiple grocers.

Operating margins were 11.6%, compared to 13.4% last year.

A spike in capital expenditure was driven by an £8.4m investment in ingredients handling and processing assets. However, the group the group still ended the period with a net cash position of £4.6m, a slight improvement on last year's £4.2m

The £30m share buyback is on track to complete by the end of the year.

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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.