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AG Barr - Growth across all divisions but challenges remain

AG Barr reported revenue of £157.9m in the six months to 31 July, up 16.7%. That was driven by strong sales growth in all business units, ongoing...

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AG Barr reported revenue of £157.9m in the six months to 31 July, up 16.7%. That was driven by strong sales growth in all business units, ongoing brand investment and the successful execution of pricing and promotional activity. This helped support a 22.8% rise in underlying profit before tax to £25.3m.

Strong sales growth helped offset the impact of cost inflation, resulting in operating margins remaining flat at 16.2%. The group doesn't expect this to be sustained, though. Full year operating margins are expected to be around 14%.

The group announced an interim dividend of 2.5p per share, up 25% from last year and continues to expect full year profit performance ahead of last year.

The shares were broadly flat following the announcement.

View the latest AG Barr share price and how to deal

Our view

The IRN-BRU and Rubicon maker looks to be firmly back on stable footing. The reopening of bars & restaurants and some unexpectedly pleasant British summer weather both provided a boost to sales over the first half.

As consumers get back to normal daily activities, demand is shifting away from at home options and restaurant and bar sales are reaping the rewards. AG Barr's strong brands have helped it capture a good amount of returning sales.

And the group's leveraging those brands to spin out new products. The Rubicon name is being put on a new energy drink to sit alongside IRN-BRU energy, as the group looks to capture more of the growing energy drinks market. Increased investment into the business allowed for a successful launch of the Rubicon product. This was welcome news and is helping to claw back some of the revenue lost when the Rockstar franchise deal was terminated a couple of years ago.

That brings us on to Funkin, which sells a range of pre-made cocktails in both bars/restaurants and for consumers at home. Performance was impressive at the half year mark, and it offers a genuine avenue for growth. Bar and restaurant sales have made a strong recovery as restrictions eased over the year. And 'at home' cocktail sales continued to grow despite bars reopening. As demand heats up the growth has presented its own challenges, causing some supply chain issues that'll need to be ironed out.

For the wider business, cost inflation is being felt too- particularly across supply chains and energy costs. For now, cost controls and price increases look to be keeping the impact low, but management have already voiced their expectations for margins to fall by the end of the year.

Positive free cash flow throughout the pandemic provided the foundations for a healthy balance sheet. At the half year mark the group is sitting on £61.1m in net cash, not to be sniffed at in the current climate. This helps prop up the 3.0% prospective dividend yield. Remember though, no dividend is ever guaranteed The balance sheet also means the group has firepower to pursue non-organic growth opportunities if they arise, like the recent purchase of a 61.8% stake in MOMA Foods, where full ownership is targeted by 2024 We like Barr's focus on faster growing niche areas of the industry. MOMA is a producer of oat milk, (a sector growing at 16%) with one in three British consumers now drinking plant based milk.

Overall, strong branding and net cash position should make AG Barr relatively defensive over the long-term. But there's not too much to get excited about, with sales growth over the next couple of years expected to be in the low single digit range. That's likely why the group trades below its longer-term price-earnings ratio.

AG Barr key facts

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.

Half Year Results

Soft drinks, which include the likes of IRN BRU and Rubicon, saw revenue rise 12.3% to £131m. This reflected significant price growth helping offset a 3% fall in volumes. Gross profit increased 8.7% to £58.9m

Funkin, which forms the Cocktail Solutions segment, saw strong revenue growth of 21.4% to £22.7m. Gross profit followed a similar pattern rising 24.7% to £9.1m.

'Other' segment had revenues of £4.2m and gross profit of £1.4m. This is a newly reported segment, with no comparison available for the same period last year. Our understanding is this segment relates to Barr's investment in oat milk producer MOMA.

Free cash flow was £4.4m, down from £15.5m this time last year. That reflects a large increase in capital expenditure as the group increases production capacity and capability. Full year capital expenditure is estimated between £16-20m up from £5m . This level is expected to be maintained for at least two more years. The group had a net cash position (excluding lease liabilities) of £61.1m at the half year mark.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 27th September 2022