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Wednesday 24 April 2019

John Lynch: 'Britvic avoids the sugar tax rush to inject real fizz into its results'

Shares hit record high for soft drinks giant

Bubbling up: Shares hit record high for soft drinks giant
Bubbling up: Shares hit record high for soft drinks giant

John Lynch

It seldom happens that a division of a big, noisy conglomerate can find itself and blossom forth like a butterfly, emerging from the chrysalis. Indeed it may be a bit romantic to think that this is what happened to the British soft drinks producer Britvic, but the company is having something of a golden period at the moment.

Once a subsidiary locked firmly in the interior of a brewing giant, Britvic in the last decade and a bit has been able to capitalise on all the health-giving qualities of its products, detaching itself from the modern world's newest demon - too much sugar.

While other soft drinks producers are having to battle with the challenges that obesity is presenting and are having to deal with the knock-on political effects on ballooning government health budgets, Britvic leads something of a charmed life. It has moved its portfolio to drinks with low or no sugar products and virtually all its products are below or exempt from the sugar tax level.

Britvic has fought for its place in the sun since it first started producing fruit drinks 80 years ago. It has been owned by major players in the drinks game like Showering and Allied Breweries. Fourteen years ago the company was floated, allowing its then shareholders Whitbread, Pernod and Intercontinental Hotels to realise their investment. Recently, Pepsi sold its long-held 4pc shareholding but this decision has no impact on its bottling and marketing arrangement.

Britvic, the UK's second biggest soft drinks company, produces carbonated soft drinks, water and cordials with operations in the UK, Ireland, France and Brazil, generating revenues of £1.5bn (€1.74bn). Most of its operations in the UK and Ireland are concentrated on soft drinks, while its French operation focuses on fruit juices. The company had the advantage that its leading brands have strong market positions like Tango and Robinsons (UK), Teisseire (France), Ballygowan and Club Orange (Ireland) and Brazil's De Fruita.

Given its history, it is hardly surprising the UK is Britvic's largest market with 60pc of total revenues. Last year was not easy for the company, following the collapse of a major UK distributor, Conviviality, the introduction of the British sugar tax and the completion of a major investment programme. The company also had to cope with the CO2 shortage which held it back from making the most of last summer's heat wave. To prevent empty shelves it was forced to scale back advertising and focus on its fruit juices.

The company faces some challenges beyond its home market. Britvic France, which accounts for 18pc of group revenue, is facing problems of falling sales. While the majority of the decline was in private label, its branded products also saw a modest reduction.

The situation in Brazil is no better. It acquired two soft drinks companies in the last four years - one with the wonderful name of Impessa Brasilera de Babidas Alimentos, followed by the purchase of Bela Ischia. They contribute 12pc to group revenues but trading is "challenging" with economic uncertainty and a difficult consumer environment.

Overall, the group delivered a strong performance in challenging conditions with good revenues and earnings growth. Revenues rose 5pc to £1.5bn and profits were £175m (€203m), up from £145m five years ago. Britvic is near the end of its investment programme and should see an improvement in reducing its high debt.

The stock is trading at a record high of £9.55 (€11.08), up 40pc on the year. Capital expenditure is expected to reduce in future years which should see a surge in free cash flow. The market is impressed by recent performance and values the group at £2.5bn (€2.9bn).

In normal circumstances one could expect a step-change in the coming years, but like most UK shares how Brexit pans out is of concern.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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