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Fevertree Drinks - Sales strong, but logistics costs a headwind

Nicholas Hyett, Equity Analyst | 15 September 2021 | A A A
Fevertree Drinks - Sales strong, but logistics costs a headwind

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Fevertree Drinks plc Ordinary 0.25p

Sell: 1,035.00 | Buy: 1,040.00 | Change 0.00 (0.00%)
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Fevertree reported a 36% rise in first half revenues, which reached £141.8m. That reflects very strong growth outside of the UK, with US sales up 32% and European sales more than doubling. Off-trade sales remained strong, even as restaurants and bars started to re-open.

Operating profits rose more slowly than revenue, rising 18.2% to £25.3m, as global logistics disruption increased freight and storage costs.

The board proposed a dividend of 5.52p per share, up 2% year-on-year.

The shares were broadly flat following the announcement.

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Our View

Fevertree seems to be emerging from the pandemic in remarkably good shape.

Falling sales in the UK prior to the coronavirus outbreak had sparked fears the gin boom had turned to bust. While guidance for weaker sales in the US and lower margins undermined Fevertree's long term pitch that it can replicate its success across the pond too, 18 months later and those fears seems misplaced.

The UK is back to modest growth, while new flavoured soda launches and marketing tie-ups with spirit manufacturers are turbo-charging sales in the US and Europe. It's worth noting that the group is benefitting from very weak comparators - in the first half of 2020 many customers were shut and several of those that were open were running down existing inventory rather than buying more stock. But still, underlying growth looks healthy.

In the past Fevertree has benefited from significant operational gearing. It outsources most of its operations - think bottlers and distributors - and that gives the group flexibility and makes expansion cheaper. A lean operating model means profits drop straight through to cash to reinvest to fund growth. Although significant inventory build means that link has been temporarily disrupted in the aftermath of the pandemic.

However, despite the recovery, explosive UK growth is over - there's a limit to how much premium tonic you can sell and it looks like Fevertree is approaching it. In order to keep making progress international expansion is key, particularly in the US.

Logistical challenges, particularly those associated with getting stock to the US are hitting margins. The group hopes to address them through new bottling partnerships in the US, but a shortage of HGV drivers and input cost inflation look set to remain moderate headwinds for the rest of this year.

Overall we think Fevertree is better placed today than it was at the start of the pandemic - and there's not many business where you can say that. But the stock trades on a very high valuation, at 48 times earnings. Promising US growth needs to continue and accelerate if that's to be justified.

Fevertree key facts

  • 12m forward P/E ratio: 48.0
  • Average 12m forward P/E ratio since listing: 47.3
  • Prospective dividend yield (next 12 months): 0.8%

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

UK sales rose 4% to £50.3m. That reflects recovery in the on-trade (bars and restaurants) - which saw sales rise 16% year-on-year, despite being closed and under restrictions for longer than in the same period last year. Off-trade (shops) sales remain 24% ahead of 2019, as the group continues to gain market share (now at 38.5%).

Sales in the US rose 42% to £36.2m. That reflects new contract wins in the on-trade segment, such as Hyatt Hotels and Bar Louie, while off-trade rose 17% year-on-year and more than doubled compared to 2019. The group's new flavoured soda lines have made a "substantial" contribution to sales in the half.

European sales rose 104% to £41.3m, or 36.7% if you exclude the effect of the GDP acquisition. Very strong growth reflects a sell-in to importers as they prepared for the summer period as well as lapping a period of de-stocking in 2020. However, underlying growth remain impressive at around 30%, with particularly strong growth in Switzerland, Denmark and France.

Rest of World reported sales of £14.0m, up 71% year-on-year. The region benefited from the timing of orders, but underlying growth still came in at around 40%. Key markets Australia and Canada continue to grow strongly.

Gross margin fell 2.7 percentage points to 44.1%, reflecting increased logistics costs and lower margins in the acquired GDP portfolio. In particular higher costs associated with shipments to the US have weighed on results, which the group expects to mitigate through increased local production from 2022. The group is ramping up production at its West Coast bottler and now has six bottlers and two canners globally.

Fevertree reported free cash flow of £1.6m in the half, down from £20.1m a year ago, as inventories and money owed to the group by customers increased substantially. Net cash fell 3% to £133.2m.

The group expects to deliver full year sales of £295m-£304m, with a gross margin of around 43% and cash profit margin of around 20%.

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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.