Barr (A.G.) (BAG) Ordinary 4 1/6 pence
HL comment (8 April 2020)
AG Barr's revenues fell 8.5% for the year ending 25 January 2020, to £255.7m, and profit before tax fell 17.3% to £37.4m, excluding exceptional items.
Having seen volumes fall relative to the strong summer in 2018 and following the introduction of the Soft Drinks Industry Levy, IRN-BRU returned to growth in the final quarter and recovery plans are being implemented for the Rubicon and Rockstar brands.
Given the ongoing disruption caused by COVID-19, AG Barr has suspended its dividend to preserve cash.
The shares fell 4.5% in early trading.
As recently as 23 March, AG Barr was primarily concerned about the 10% of the business selling through the likes of pubs, restaurants and hotels. Due to government restrictions, sales in these locations are likely to be close to nil for the foreseeable future.
However, management is now also worried about the c.40% of the sales that come through "impulse" purchases. Now that most of us aren't out and about we're not buying an IRN-BRU on the fly, and that's a bigger problem.
AG Barr had been persevering through a tough year already. The group kept prices low following the introduction of the Sugar Tax in 2018, but moving back to a more normal pricing structure has proved painful. Add challenging market conditions and some problems with the Rockstar and Rubicon brands, and it's been a difficult time.
The ship appeared to have steadied, and there were early 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's a big step in the right direction.
The Barr family remain heavily involved in the business too. Collectively, the family control a sizable chunk of the company, and the desire to pass the business on to the next generation means the board adopts a sensible and sustainable approach to future growth.
Fortunately, the balance sheet isn't a particular issue. The group has drawn down its £60m revolving credit facility, which should be enough to see it through a difficult patch.
Pepsico plans to buy Rockstar Energy Beverages, for which AG Barr is the exclusive distributor in the UK, Ireland and some European territories, and these make up about 8% of AG Barr's sales volumes. While Pepsi may decide not to renew them upon expiration, these contracts have a few years left, so it's a problem for another day.
While we think AG Barr is better positioned than most to weather the current storm, we can't rule out a longer-term economic slump. Prolonged economic uncertainty or severe recession could weaken even the most defensive business.
Prior to the outbreak the group had an enviable dividend track record, but like so many others it's now decided to suspend the payment. The money is still in the business, and if everything goes relatively smoothly it could get returned to shareholders eventually. Nothing is guaranteed though.
Prior to the update the shares changed hands for 19.3 times expected earnings, only slightly below the long run average. However, the uncertainty means earnings expectations could change, so investors should treat this measure with caution.
Full year results
The decline in revenue reflects falls in both carbonated and still drinks. Carbonated drink revenue fell 8.4% to £196.4m as volumes declined 9.2%. Margins contracted as commodity prices rose and lower volumes were spread across a largely fixed cost base. As a result, profit for the division fell 11.3% to £88.6m. The division still represents over 76% of revenue and almost 84% of gross profit.
Still drinks and water revenue fell 18.2% to £40.1m, and gross profit fell 41.5% to £8.6m. Funkin profits rose from £7.9m to £8.9m.
AG Barr remains cash flow positive and generated £25.3m of free cash last year. The group had £10.9m in cash as of 25 January 2020 with no debt, but has since drawn down the entirety of its £60m revolving credit facilities.
The closure of pubs and restaurants has hit revenue, while the lockdown has also significantly reduced "impulse" purchases (which normally make up around 40% of revenue). "Take home" sales have proved more resilient, but trading has been volatile. Given ongoing uncertainty management is unable to say what the eventual impact will be.
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