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AG Barr - profits at top end of expectations

Nicholas Hyett | 28 January 2020 | A A A
AG Barr - profits at top end of expectations

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

Sell: 477.50 | Buy: 479.00 | Change 6.00 (1.27%)
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AG Barr expects to report full year revenues of £255m, 8.6% below last year. However, underlying profit before tax is expected to be at the top end of market expectations, at slightly over £37m. That reflects lower volumes but improved pricing.

The shares rose 7% in early trading.

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Our view

AG Barr kept prices low following the introduction of the Sugar Tax in 2018, 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 year.

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 higher margins from those inflated price tags offsetting industry-wide volume declines. That's a big step in the right direction.

We were particularly pleased at the half year 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 group's maintained its excellent record on dividend growth, and currently offers a prospective yield of 3.2% - although remember that even the best track record is no guarantee of future success.

Prior to the full year trading statement, the shares changed hands for 20 times expected earnings, a bit above the ten year average of 19.5.

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Full Year Trading Update

Having focused on volume growth during 2018 AG Barr's pricing was more closely aligned to the market average in 2019. Together with tougher trading conditions last summer that had a negative impact on overall volumes.

The group is working on improving the performance of the Rockstar and Rubicon brands, while IRN-BRU has returned to growth and Funkin continues to perform well.

The first phase of the group's restructure is complete, with the £1.5-£2m costs offset by a one-off gain related to the removal of a wind turbine at the Cumbernauld site.

The group's balance sheet "remains robust".

Commenting on the results CEO Roger White said: "We enter the new financial year with confidence and a strong trading plan".

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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 disclosure for more information.