AG Barr reported revenues of £113.2m in the six months to the 25 July, a 7.6% fall. That was driven by the closure of bars and restaurants, with Funkin Cocktails particularly hard hit.
Profit before tax fell 62.2% to £5.1m. However, that was driven by restructuring costs and a £10m impairment to the Strathmore water brand, following the closure of the hospitality sector. Excluding these exceptional expenses operating costs were lower year-on-year, with profits up.
The dividend remains under review but is expected to return in 2021.
The shares rose 2.4% in early trading.
AG Barr's exposure to the 'on-the-go' and hospitality sectors meant the lockdown was always going to be hard. However, we think sales have actually held up rather well overall - helped by modest growth in IRN-BRU sales during the half.
The really big hit at the half year isn't from lower sales, but a big write down in the value of the group's water brand Strathmore - beloved of hotels and pubs nationwide. The group has written the brand's assets down to zero and expects a slow recovery, with Strathmore sales unlikely to return to pre-covid levels in the foreseeable future.
The impairment doesn't bode well for future sales. But impairments are a non-cash item, so they don't cost the group cash here and now. That's one reason why cash generation has actually been very strong over the lockdown period.
The other is that the group has been leaning heavily on suppliers and customers to help it keep cash in the business. While delaying payments to suppliers and hassling customers for cash might not be sustainable in the long term - it does mean AG Barr's been able to substantially increase its cash on hand at a time of crisis.
A strengthened balance sheet position, together with brands that we think have long term futures mean AG Barr is relatively well placed. While the group will struggle along with the rest of the economy if the UK slides into a sustained recession, sales won't evaporate overnight and it's got the financial firepower to weather the storm.
Unfortunately there are some company specific headwinds that could make recovery more challenging than we might otherwise hope.
Pepsico agreed to buy Rockstar Energy Beverages in March, for which AG Barr is the exclusive distributor in the UK, Ireland and some European territories. Pepsi has decided to cancel AG Barr's contract early, and while the group will receive some compensation payments, Rockstar made up 8% of sales.
The group has also faced problems with the introduction of the sugar tax. Prior to the pandemic there were signs that customers were coming round to the idea of higher prices, with higher margins from those inflated price tags offsetting industry-wide volume declines. That was a big step in the right direction - and we're encouraged that IRN-BRU sales have continued to tick up.
Those headwinds might explain why the shares are trading on their lowest PE ratio in 3.5 years or so - unusual for a defensive company with a net cash position on the balance sheet. However, with management choosing to leave the dividend in limbo for now, despite a historically impressive record of dividend growth, clearly the company itself is nervous times could yet get tougher and past performance is not a guide to the future.
AG Barr key facts
- Price/Earnings ratio: 16.5
- 10 year average Price/Earnings ratio: 19.6
- Prospective yield: 3.9%
Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results
The group saw sales of its Carbonates rise 2.6% in the half to £93.6m, with IRN-BRU sales up 1% and the Barr brand up 13%. The Rockstar contract has been terminated, with AG Barr stopping manufacturing in January 2021.
However, that was offset by weakness in still Drinks & Water where sales fell 39.6% to £13.1m. That reflects the weakness in Strathmore water sales - especially into the hospitality sector - while Rubicon sales are also struggling, down 9% year-on-year.
Funkin sales fell 32.3% to £6.5m. That reflects weakness in sales to bars, partially offset by strong sales in the retail and online channels where sales rose over 170%. The strong direct to consumer performance was driven by the nitro infused ready to drink cocktails.
Exceptional costs incurred during the half include, £1.5m relating to restructuring activity, which started in 2019 and extended into 2020 following the coronavirus outbreak. Additional costs primarily related to redundancy costs, including at Strathmore. Excluding this cost and the impairment of Strathmore assets, pre-tax profits would have risen 19.4% to £16.6m.
Free cash rose 542% to £21.2m, reflecting the fact that exceptional costs are predominantly non-cash charges. There was also a significant improvement in working capital (as the group delayed payments to suppliers and improved collections from customers). As a result net cash on the balance sheet rose from £10.9m at the start of the year to £30.4m.
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