Premium carbonated mixers marvel Fevertree Drinks (FEVR:AIM) fizzes 10.2% higher to £38.08 on news that full year profit ‘will be comfortably ahead of expectations’ following a palate-pleasing first half showing.
After a relatively cautious statement in March, where the usual upgrades weren’t forthcoming, the posh tonic water-to-ginger beer purveyor is back in business, issuing no less than a seventh upgrade in a year and a half.
Results for the half ended 30 June reveal revenue up a forecast-busting 45% to £104.2m and a 36% pre-tax profit rise to more than £32.65m, albeit gross margin is slightly lower at 53.2% (2017: 54.5%) amid currency headwinds and cost increases from a push into the US.
Encouragingly, the soft drinks star turn lifts the dividend 40% to 4.22p, underpinned by a bulging net cash pile of £56.4m (2017: £40.5m).
During the six month period, the UK business generated exceptional growth. Sales bubbled 73% higher to £58m amid strong product take-up with major retailers and the on-trade (bars, hotels, restaurants) amid growing consumer demand for high quality mixers to accompany premium spirits.
Chief executive Tim Warrillow says the first half of 2018 has been one of major progress for the company. ‘The group delivered a strong performance, most notably in the UK, as we continue to drive and lead the evolution of the wider mixer category.
‘Furthermore, our relationships with key customers and spirits partners mean we are increasingly well positioned as the growing move to premiumisation and long mixed drinks continues to develop across the globe.’
Exposure to the brand has no doubt been boosted by this summer’s sponsorship of the prestigious Queen’s Club grass tennis tournament in London.
The ‘Fever-Tree Championships’ was the AIM success story’s inaugural title sponsorship of a major sporting event and was covered by BBC television, radio and online, by Amazon Prime Video and around the world in more than 40 countries.
During the half year period, Continental Europe revenues rose 17% to £25.8m with Fevertree profiting from the Western European Gin & Tonic boom, while US sales sauntered 15% higher to £15.1m.
(BIG) BUCKS FIZZ
It is fair to say that 2018 is a transitional year for Fevertree across the pond, where the premium mixer market remains at a relatively early stage. Importantly, the trend towards premiumisation across different spirits categories and the focus on provenance and long mixed drinks is accelerating.
Fevertree took over direct control of its US distributor relationships on 1 June and has built a new team of around 32 people.
Warrillow is palpably excited by the significant opportunity across the pond for Fevertree’s tonics as well as its wider mixer range for dark spirits, the latter an increasingly important part of the investment case.
Since the half-end, Fevertree has inked an agreement with Southern Glazer’s Wine and Spirits (SGWS), North America’s biggest wine and spirits distributor, to be its exclusive distribution partner in the on-trade channel across 29 US states.
Warrillow insists the tie-up ‘is a significant endorsement and provides a strong platform for Fevertree US in 2019 and beyond.’
THE ANALYSTS’ VIEW
Investec Securities analyst Nicola Mallard upgrades her price target from £32 to £38.45 and increases her 2018 sales estimate by £15m to £220m, taking forecast pre-tax profit and earnings up 9% to £67.8m and 46.8p respectively.
Mallard argues that Fevertree’s changes to its arrangements with US distributors ‘should give it largely national coverage with the largest wine and spirits distributor in the US’.
Russ Mould, investment director at A Bell, calls Fevertree ‘a true British success story’.
He says its success demonstrates how it is possible to take a seemingly commoditised product, introduce a higher quality version and shake up a market where the previous leader Schweppes had its eye off the ball and didn’t have sufficient barriers to block new competition.
‘It has clearly built up a powerful brand, saying there is now evidence of consumers being attracted to the world of premium mixers for the first time.
‘And the management of Fevertree have perfected the art of under-promising and over-delivering, given it once again says earnings will beat expectations.
‘It is very refreshing to see management not get carried away by their success and declare they are going to smash sales records around the world, such as you might expect from someone in its strong situation.
‘Ever since it joined the stock market in 2014, Fevertree has managed to restrain from over-hyping its sales outlook and just focus on the facts in hand. This is the sign of a great company - focus on executing the business strategy and the rest (i.e. the share price) will take care of itself.’
