Fevertree Drinks plc (FEVR) Ordinary 0.25p
HL comment (18 March 2021)
Fevertree's full year revenue fell 3% to £252.1m, as bars and restaurants, which usually account for 45% of group sales, were disrupted by the pandemic. However, retail sales rose to help offset this. Underlying cash profits fell 26% to £57.0m, as margins fell from 29.6% to 22.6%.
Management expects some retail demand to unwind as conditions normalise. Overall, it's predicted revenue will grow 12-16%, and underlying cash profit margins will be consistent with 2020, in the current financial year.
The board announced a final dividend of 10.27p per share, taking the full year dividend to 15.68p (2019: 15.08p).
The shares fell 8.0% in early trading.
Before Coronavirus, falling sales in the UK sparked fears the gin boom had turned to bust. Meanwhile 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.
However, the disruptive effects of the coronavirus outbreak mean it's difficult to see whether those trends are continuing. Bar and restaurant sales usually make up about 45% of the group's sales and that's where the lockdowns hit. While there's been an encouraging upswing in sales from retail partners, sales have fallen overall. That said, sales still grew in the US, which is encouraging.
Fevertree has benefited from significant operational gearing during the good times. 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. Unfortunately, that works in reverse too. When sales slow, the high fixed costs have a significant impact on margins.
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. It's a comparatively untapped market, and the group's investing heavily to try and secure a piece of it.
But although Fevertree retains an excellent business model, very strong brand and a sturdy balance sheet, we think the next few years could be a struggle. North American tastes are geared towards dark spirits like Whiskey and Rum. That puts Fevertree's ginger ales and colas centre stage, and the competitive landscape there is crowded. International rivals will have learnt from Schweppes' failure in the UK and be better prepared.
The decision to grow the dividend is a major vote of confidence in the coming year, and also reflects a sizable net cash position. However, if bar and restaurant sales remain subdued or the vaccines aren't as successful as hoped the group's growth plans could be set back even further.
It is worth remembering that Fevertree is trading on a very high valuation, which means the shares are likely to be very sensitive to disappointment.
Fevertree key facts
- 12m forward P/E ratio: 50.7
- Average 12m forward P/E ratio since listing in 2014: 47.0
- Prospective yield: 0.7%
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
Fevertree's UK sales fell 22% to £103.3m, reflecting a 62% decline in sales from bars and restaurants. Retail sales grew 20%, and Fevertree finished the year as the UK's number one mixer with a 40.1% market share. The group says it has maintained strong relationships with its bar and restaurant partners, in part by offering flexible payment terms during lockdowns.
US sales grew 23% to £58.5m, or 26% excluding the impact of exchange rates. Full year retail sales grew 57%, which was better than management expected. Price cuts and sustained marketing spending continued to attract new customers. Fevertree has recently signed a deal with a new West Coast bottling partner, which management expects to ramp up production and reduce transport and logistics costs.
European revenue rose 1% to £65.3m, which was driven by a "very strong" retail performance. Fevertree has maintained its market leading position in core markets such as Belgium and Denmark. The group is targeting growth in Germany, Spain and Italy, although the latter two are reliant on tourism and bar and restaurant sales, making 2020 particularly tough.
Sales in the Rest of the World grew 58% to £25.0m, reflecting strong growth in the key Australian and Canadian markets.
Operating costs rose 8.7% to £59.3m as the group continued to invest in marketing and staff. However, capital spending fell from £6.4m to £2.5m.
Free cash flow was £35.5m, compared to £65.4m, largely because of the lower profits. Net cash has increased 12% over the year to £143.1m.
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.
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