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Fevertree - special dividend, but outlook downgraded

Fevertree reported full-year revenue of £311.1m, up 26% ignoring the effect of exchange rates, reflecting growth across all markets...

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Fevertree reported full-year revenue of £311.1m, up 26% ignoring the effect of exchange rates, reflecting growth across all markets. Supermarket sales remain above pre-pandemic levels, with sales in bars and restaurants recovering in the second half.

Strong revenue growth helped underling cash profits (EBITDA) grow 10.3% to £63.0m despite a fall in margins from 22.6% to 20.2%.

The group expects to deliver revenue growth of 14-17% in the new financial year. However, due to "significant uncertainty in relation to input costs" cash profit growth is expected to be limited, with guidance downgraded from £69m-£72m to £63m-£66m.

The board proposed a final dividend of 15.99p, up 2%, in addition to a special dividend of 42.90p.

The shares fell 8.3% following the announcement.

View the latest Fevertree share price and how to deal

Our View

We'll start with the elephant in the room. Another downgrade on profit and margin guidance is disappointing, with the group expecting sales to rise in the mid-teens next year but little to none of that dropping through to cash profits. That suggests margins of around 17.9%, down from the 19.6% expected.

Management pointed to the ongoing crisis in Ukraine, and its impact on commodity prices, as the cause for concern over rising costs, which is understandable. But as life gets back to normal, we'd expected margins to be taken along for the ride, especially as US freight costs start to calm down and more profitable bar and restaurant sales recover. As of yet, that hasn't materialised.

Fevertree's operating model has also come under pressure. The group outsources most of its operations (think bottlers and distributors), which means a large portion of profits drop straight through to cash. However, a significant increase in inventory over the last couple of years to combat supply chain pressures means that link has weakened a touch.

Looking at the broader picture, there are some positives to consider.

The UK is back to modest growth, while new flavoured soda launches and marketing tie-ups with spirit manufacturers are helping sales in the US and Europe. It's worth noting that the group is benefiting from very weak comparators - in 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 both Fevertree's core and growth markets.

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.

There's some positive progress being made on supply chains across the pond, with the group's new bottling partnership set to increase production in the first half. Sourcing supplies from within the States should reduce costly shipping fees and help provide a boost to margins moving forward.

Overall, Fevertree has a strong brand and broader consumer trends are supportive of the company's products. But in the short term, the group needs to get a tighter grip on costs so margins can start to move in the right direction again. Despite coming down this year, the stock still trades on a very high valuation. We struggle to get too excited at this valuation while margins and profits struggle to keep pace with sales.

Fevertree 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.

Full Year Results (constant currency)

Revenue in the UK grew 15% to £118.3m. That reflects the recovery of the on-trade (bars and restaurants), where sales grew 59%. Sustained popularity of enjoying long drinks from home meant the off-trade (shops) remained resilient, with sales on par with 2020 despite bars and restaurants reopening.

In the US, revenue grew 41% to £77.9m as premium spirits and mixers increased in popularity. The group launched its second production site toward the end of the year, with production set to gradually increase into the first half of 2022.That should improve supply chain efficiencies and reduce costs. Off-trade momentum continued, with standout performance from Ginger Beer and Tonic Water.

Total European revenue increased by 40% to £88.2m. The summer tourist season helped on-trade sales rebound quickly when bars and restaurants reopened. Increased interest in the mixer category, and strong performance from new launches like Rhubarb & Raspberry Tonic, meant supermarket sales continued to perform ahead of expectations.

Rest of World saw sales grow 6% on a reported basis to £26.7m. Australia and Canada are both seeing growth in the premium mixer markets and the group's continuing its push in Asia, entering 3 new markets last year.

Free cash flow came in at £43.2m (2020: £35.5m), largely due to higher profits which helped net cash increase to £166.2m (2020: £143.1m).

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 16th March 2022