IRN-BRU, Rubicon and Strathmore water maker A.G. Barr (BAG) reports a rebound in sales growth for the second half and assures the market's subdued full year profit expectations will indeed be met.
The year end trading update is greeted with relief by A.G. Barr bulls - Shares has the soft drinks manufacturer as a running Great Ideas pick - the shares bid up 11.5p (2.3%) to 513.5p, although CEO Roger White (pictured below) warns '2017 will be another challenging year for UK based businesses'.
SOGGY BACKDROP
Cumbernauld-headquartered A.G. Barr encountered ultra-competitive UK soft drinks market conditions in the financial year to 28 January.
Interims (27 Sep '16) reflected deflationary and promotional market conditions and poor early summer weather. Total sales softened to £125.6m (2015: £130.3m) and like-for-like sales fell 2.8%, though pre-tax profit before exceptional items edged up to £17m (2015: £16.9m) on improved operating margins. Return on capital employed (ROCE) grew 110 basis points to 20%, underscoring management’s shareholder value creation credentials.
Poor sentiment towards the stock has also reflected worries over the government's proposed soft drinks sugar tax, though A.G. Barr is pivoting successfully towards consumers' growing clamour for lower and no sugar products.
SECOND HALF FIZZ
White today flags a strengthened second half performance, 'supported by successful product innovation, specifically through the launch of IRN-BRU XTRA and Rubicon Spring.' He says 'revenue for the 52 weeks ended 28 January 2017 is expected to be around £257m. On a like for like basis revenue growth from ongoing business is anticipated to be circa 1.5%', effectively a rebound in top line growth in H2 and helping the beverages business to outperform the market last year.
Bearing down on costs, having carried out a company-wide re-organisation in the final quarter that has reduced overheads, White assures the operating marging for the year will meet forecasts. Moreover, he adds: 'We continue to develop the business for the long term and are pleased to announce plans to invest £10m in PET capability at our Milton Keynes facility, building on our already well-invested asset base to further improve efficiency and flexibility.'
THE ANALYSTS' VIEW
Shares has a positive stance on A.G. Barr, fans of its differentiated brand portfolio, strong balance sheet and free cash flow and progressive dividend. Although sterling weakness presents an increasing input cost headwind, the business is resilient as soft drinks are low ticket items.
Broker N+1 Singer has softened its stance on A.G. Barr, analyst Sahill Shan today commenting: 'We marginally nudge up our FY17 PBT by 1%', to £42.3m (2016: £41.8m), 'but lower our outer year expectations by 2-3% to reflect higher input cost pressure. Our Sell stance in 2016 served us well but with shares trading close to our new 12 month target price of 500p (from 475p) we move to a Hold.'
