Beverages giants Diageo (DGE) and SABMiller (SAB) boast strong recognition among London’s investment community, while overseas-listed names such as Heineken (HEIN:AS) and Carlsberg (CARLB:CO) are widely known by the layman due to their eponymous brands.

Yet one less well-understood alcoholic beverages business with a strong stable of brands is C&C (CCR). This is rather curious, since most of us will have consumed the Dublin-headquartered company’s products, either on a raucous night out or to quench a thirst whilst soaking up the rays in a balmy pub beer garden.

Though C&C is highly cash-generative and rising consumer confidence and disposable income could boost performance, we are worried by the numerous headwinds it faces and we don’t see too many catalysts for a near-term re-rating.

C&C in focus

C&C is the manufacturer, marketer and distributor of a range of branded cider, beer, wine and soft drinks, but predominantly, it makes branded long alcoholic ciders. It is responsible for leading Irish cider brand Bulmers, as well as premium international cider brand Magners and the C&C Brands range of English ciders and Tennent’s beer. The beverages company also distributes a number of beer brands in Scotland, Ireland and Northern Ireland for Budweiser brewer AB InBev (BUD:NYSE).

In addition, C&C owns and manufactures Woodchuck and Hornsby’s, two of the leading craft cider brands in the US. And on top of all this, C&C’s Irish wholesaling arm Gleeson owns and makes Tipperary Water and Finches soft drinks, and the company also owns Scottish drinks wholesaler Wallaces Express.

Soggy outlook

Brand strength is undoubtedly a key competitive advantage of C&C’s, yet disappointingly, the company has not been able to report positive group organic growth since 2007. And this is despite operating primarily in the growing cider category.

Investors will therefore need to see a significant turnaround in C&C’s performance if the shares are to rebound from current depressed levels. Little wonder that US activist investor Orange Capital reportedly wants C&C to sell off its struggling US business, consider a sale of its business in England and Wales and focus on its core markets of Ireland and Scotland.

Forecast downgrades followed interim results (28 Oct), revealing 2.6% top-line decline to €358.6 million (£255.2 million) and a 9.5% drop in operating profit to €62.6 million, caused by tough trading in core markets Ireland and Scotland and a sub-par performance across the pond.

CEO Stephen Glancey was at pains to point out many of the factors behind the dour performance were ‘one-off or transitional’. These included poor weather, which crimped Bulmers volumes, the transition to a brand-led wholesale model, the impact on beer volumes in Scotland from tighter drink-driving legislation, not to mention increased competition from new entrants in the cider and craft categories.

Indeed, in the important Irish market, the competitive landscape is toughening for C&C. In the off-trade, Heineken’s Orchard Thieves brand is thought to be gaining traction, while in the on-trade, craft ciders are continuing to take ‘tap handles’ from C&C. Worryingly, the US business witnessed a 12.5% sales decline in a market growing at over 30%.

Glancey warned these aggregated headwinds will cause a €10 million profit hit in the current financial year, though the positive news is C&C is now targeting a further €15 million of annualised cost savings, which it can reinvest in marketing spend, and also reaffirmed a net debt/EBITDA target of two times.

One avenue of considerable opportunity for C&C is exports, where capital light expansion through distribution and licence agreements is management’s preferred model - and thanks to its well-invested domestic asset base, C&C is driving volume growth with minimal extra cost. During the first half, export operating profits frothed up by 31% to €2.1 million, fuelled by the Magners, Tennent’s and Shepton brands.

Glancey sees cider as an international growth driver across Africa, Asia Pacific and Europe and new distribution arrangements have been put in place for Poland, South Korea and Nigeria ‘with further countries to follow in the second half.’

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Corporate possibilities

Although it is struggling to generate high-quality organic growth, C&C is copiously cash generative, having reported 115.6% growth in free cash flow to €66.4 million in H1. This cash flow, allied to a strong balance sheet, gives it the flexibility to pursue corporate opportunities, albeit acquired growth is a riskier way of boosting the top line performance, as well as to invest in competitive advantage and fund capital returns. Having upped the half-time payout 5.1% to 4.73 cents, C&C also plans to re-initiate share buy backs and return up to €100 million to shareholders by July 2016.

Against a backdrop of further consolidation in the brewing sector, C&C has been linked with a number of intriguing transactions. The Irish drinks company is thought to be running the rule over acquiring assets likely to be sold once the mega-merger of AB InBev and SABMiller goes through. C&C mainly focuses on ciders, but is thought to be weighing a tilt at the Bass and Boddington’s beer brands, both owned by AB InBev and which could fetch circa £30 million apiece.

Over the summer C&C, keen to expand outside Ireland and Scotland and bulk up its portfolio in England and Wales, is thought to have held talks with Carlsberg about a deal to buy the Danish brewer’s UK business. Last year, C&C was even rebuffed by taverns operator Spirit Pub, which eventually agreed to be acquired by larger rival Greene King (GNK) in a £774 million deal. C&C was interested in Spirit as a way of matching its route-to-market strength in Ireland and Scotland over in England and Wales through the management of Spirit’s high-quality pub estate, though the potentially audacious strategic shift from C&C unnerved investors at the time.

Risks remain

Berenberg is less than enthused by the C&C investment case, with a ‘hold’ rating and €3.50 price target. Its downgraded forecasts for the year to next February point to sluggish top-line progress to €690 million (2015: €684 million) for earnings of 25.8 cents, with sales then set to sag to €676 million for earnings of 26.7 cents by February 2017. Based on this year’s forecast dividend of 12 cents, C&C does at least offer a 3.25% yield.

Risks to earnings include the perennial threat of unseasonably cold weather, a frequent occurrence given its core markets are Ireland and Scotland. In addition, there’s increased competition from rival brewers entering the cider category as they seek to capture the opportunity of female non-beer drinkers. Rising excise duties is another worry; in fact, Berenberg flags the potential risk from ‘equalisation of cider excise duty with that of beer in the UK, Ireland and/or the US’, which could ‘materially affect the growth of the category in these markets.’ And last but not least, given C&C’s lack of organic progress, there is the chance it could overpay for an acquisition, squandering shareholder value in the process.

At €3.69, we think C&C is one to avoid near-term given the risk of further downgrades. Organic growth has disappointed for some time in Ireland and Scotland and scope for value destructive M&A makes us nervous.