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AG Barr - better than expected numbers despite disruption

Nicholas Hyett, Equity Analyst | 26 January 2021 | A A A
AG Barr - better than expected numbers despite disruption

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

Sell: 507.00 | Buy: 510.00 | Change -1.00 (-0.20%)
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AG Barr has been hit hard by the increased restrictions in place since early December, particularly in the hospitality and "drink now" categories.

However full year revenues are expected to come in at around £227m, lower than last year's £255.7m but marginally ahead of guidance provided in September. Operating margins are in line with last year, and as a result underlying profits are expected to be ahead of market expectations.

The group expects to finish the year with net cash of around £50m.

AG Barr shares rose 2.1% in early trading.

View the latest AG Barr share price and how to deal

Our view

AG Barr's exposure to the 'on-the-go' and hospitality sectors has made lockdown hard. However, we think sales have actually held up rather well overall - helped by modest growth in IRN-BRU during the first half and a good start to the second half.

The really big hit at the half year came not 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 brand's assets have been written down to zero and recovery will be slow, with Strathmore sales unlikely to return to pre-covid levels in the foreseeable future.

Fortunately impairments are a non-cash item, so don't cost the group cash here and now. Cash generation remained pretty strong in the first six months of the year as a result, and has stayed in positive territory in the second half too.

It's helped that the group has leant 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.

There are some headwinds outside the group's control though.

AG Barr has 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 continued to tick up last year.

Less positive is Pepsico's decision to buy Rockstar Energy Beverages last March. AG Barr was Rockstar's exclusive distributor in the UK, Ireland and some European territories, but Pepsi has decided to cancel AG Barr's contract early. The group will receive some compensation payments, but Rockstar made up 8% of sales last year and that's a big slug of revenue to replace.

With several smaller brands struggling the group is leaning ever more on IRN-BRU to deliver, and a one trick pony is a risky investment. While a sticky customer base and net cash position should make the group relatively defensive, we think that's reflected in a PE ratio that's broadly in line with the longer run average. With growth a challenge and the dividend still in limbo, we struggle to get excited about the near term.

AG Barr key facts

  • Price/Earnings ratio: 20.6
  • 10 year average Price/Earnings ratio: 19.7
  • Prospective dividend yield (next 12 months): 3.0%

All ratios are sourced from Refinitiv. 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.

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Half Year Results - 22/09/20

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 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.

Find out more about AG Barr shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.