Friday 24 November 2017

Share watch: Britvic is bullish despite upcoming UK sugar tax

Britvic produces cordials, carbonated soft drinks and water. Photo: PA
Britvic produces cordials, carbonated soft drinks and water. Photo: PA
Click to enlarge

John Lynch

What do such diverse nations as Mexico, France, Finland and Hungary have in common? Not much, you may think. But they all have a sugar tax and they will be joined very shortly by the UK.

The development is, of course, prompted by the explosion in childhood obesity, which the British Chancellor, George Osborne, decided to tackle with a tax on fizzy drinks. The tax will be used to fund sports in schools.

Companies are being given a two-year grace period to fix the problem. It is posing a real dilemma for the massive soft drinks sector, but one of these companies, Britvic plc, feels it might have the problem under some control. It has been chopping and changing its product portfolio to ensure that upwards on two-thirds of its product offerings are below Osborne's sugar tax threshold.

Britvic produces cordials, carbonated soft drinks and water. It has a portfolio of leading brands like Robinsons, Tango (UK) Teisseire (France) Ballygowan (Ireland) and Dafruita (Brazil), all with strong market positions. It also makes and sells the Pepsi brands in the UK and Ireland. Over the years it has been at the centre of some tricky financial engineering being owned at various times by Showering and Allied Breweries. Today Britvic is the second-largest soft drinks company in the UK with a market share of 12pc and is valued at £1.7bn (€2.1bn).

Since its independent listing in London a decade ago, it has been on a buying spree in Ireland, France and Brazil. Two years after its floatation it purchased the C & C soft drinks division for £250m. The stable of brands included Club Orange, Mi-Wadi, TK lemonade and the bottling and distribution rights for Pepsi in all 32 counties.

This purchase was followed by Britvic's expansion into France, buying a fruit juice company with products that included Jus de Fruits, Pressade and Teisseire, the leading children's fruit juice in France.

Recently, it acquired a Brazilian soft drinks operation with the wonderful name of Empresa Brasileira de Bebidas e Alimentos (EBBA).

The UK is Britvic's largest market, with revenues of £886m last year, but it is a challenging one. Clearly with an eye to the future it moved into the 'this-stuff-is-better-for-you-than-what-you've-been-drinking-for-years' market.

It promoted the elimination of added sugar from its leading brand, Robinsons, even though volumes fell as a consequence. It was a coup to get two-thirds of its portfolio below the sugar tax threshold. In addition it has been signing deals like the one with Subway, the sandwich chain, to stock Britvic brands as well at Pepsi and other moves to improve its supply chain.

Both the Irish and French markets are well established. The French market, helped by a warm summer and a favourable product mix, contributed £240m to group revenues, in spite of price pressure. In contrast, sales in the Irish market of £120m were not helped by a poor summer. (This year will be quite different, we hope). Following its recent purchase of EBBA, the company is optimistic for the Brazilian market, the sixth-largest soft drinks market in the world, and one that will be boosted this summer by the Olympics. International sales were minuscule at £52m.

But Britvic is bullish in relation to US sales following an agreement with major supermarkets Wal-Mart and Kroger to stock its products.

Britvic's revenue declined slightly last year to £1.3bn but net profits were up 7pc to £147m. The share price over the last 10 years peaked at 760p early last year.

Currently it is trading at 653p on an earnings multiple of 15 with a decent dividend yield of 3.6pc. Dividend per share increased 10pc to 23p. Free cash flow was static at £89m while debt remains under control.

Full-year expectations have profits in the £180m to £190m range.

Is now the time to take a flutter on Britvic? In the absence of a sugar-rush, I can say, I think so. 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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