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AG Barr - revenue rises, margins remain under pressure

AG Barr saw first-half revenue of £210.4, up 10.4% on a like-for-like basis, driven by a combination...

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AG Barr saw first-half revenue of £210.4, up 10.4% on a like-for-like basis, driven by a combination of higher prices and volumes. Including the contribution from the Boost drinks business, acquired in December 2022, revenue rose 33.2%.

Operating profit rose 6.7% to £27.2m. Underlying operating margin fell 3.7 percentage points, reflecting the effect of cost inflation and the near-term impact of the lower-margin Boost business.

The net cash position fell from £61.1m to £47.3m as a result of the Boost and MOMA acquisitions at the end of last year. Free cash flow improved from £4.4m to £8.6m.

Barr expects to deliver a full-year profit performance slightly ahead of market consensus, with analysts currently forecasting an operating profit of £46.1m.

An interim dividend of 2.65p per share was announced, up 6.0%.

The shares rose 2.1% following the announcement.

View the latest AG Barr share price and how to deal

Our view

Half-year results highlighted the power of Barr's growing portfolio of brands, with the Boost acquisition causing sales to jump significantly higher. Ignoring this acquisition, like-for-like sales still grew at double-digit rates - an impressive feat given the challenging macro environment.

AG Barr's core brands have continued to perform well, driven by positive price and volume growth. And the group's leveraging those brands to spin out new products. The Rubicon name's been put on a new energy drink to sit alongside the new PWR-BRU energy drinks, which it hopes will help capture more of the growing energy drinks market.

The Funkin brand, which sells a range of pre-made cocktails to bars, restaurants and consumers at home, offers a genuine avenue for growth. The brand's grown its retail channel thanks to continued consumer marketing and remains the UK's Number 1 cocktail brand. But bar and restaurant sales growth have cooled in the first half as tougher comparative periods roll through following the post-Covid highs.

While the group anticipates continued revenue growth, there have been a few words of caution to flatten expectations. Persistent cost inflation and investment across the businesses is expected to squeeze profit margins this year.

Despite the acquisitions of Boost and MOMA in recent years, the balance sheet remains in great shape, meaning there's firepower to pursue further non-organic growth opportunities if they arise. A net cash position underpins the group's investment plans to ramp up production and increase efficiencies in these new brands. This should help grow margins over the medium term, but in the short term while this investment is taking place, margins are likely to come under more pressure.

And as previously announced, CEO Roger White has decided to turn the page on his time at the soft drinks giant after more than 20 years at the helm. A change at the top is always a leap into the unknown, and the search for his successor remains ongoing.

Forfeiting short-term margins and profits this year, to invest in what it sees as high-growth areas is a plan we can get behind. But execution is a key risk, and if the expected benefits are smaller or later than planned, the valuation could be punished.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 26th September 2023