Questor: if you want a firm that will survive a second lockdown, Britvic ticks many boxes

Questor share tip: its familiar brands and modest levels of debt should see the soft drinks maker through the worst

James Ashton 18 October 2020 • 5:00am

Britvic drinks machine — Recent investment and market opportunity should help Britvic regain fizz

It is a state of affairs to drive us all to drink, as long as we can find a pub or bar still open to serve us. The second wave of lockdowns is as unpredictable as it is controversial but has hardened at least one certainty: that economic recovery, when it comes, will be far from V-shaped.

Investors who are increasingly confined to their home should consider which companies can thrive if confinement spreads. They need good market positions, familiar brands, to be well invested and with strong balance sheets to see them through the worst. Because it is not only alcoholic tipples that have experienced a rise in living room consumption this year, Britvic ticks many of those boxes.

The company is best known for its juices and cordials – including Robinsons, J20 and Fruit Shoot – but fizzy drinks make up the biggest part of its business. That’s because it has been soda giant Pepsi’s sole bottling partner in Great Britain for 30 years and counting.

In the April to June quarter Britvic reported a 16.3pc decline in revenue – catastrophic in normal times but really rather modest compared with some of the trading seen in the outlets it supplies. For the year so far turnover is down by 5.1pc. About 40pc of group sales come from the on-trade – pubs and restaurants – with the balance from supermarkets and convenience stores. Grocery data suggests it has been gaining market share in home consumption.

Britvic’s chief executive, Simon Litherland, has so far stuck to his estimates from March that put the company’s monthly hit to earnings from Covid-19 trading restrictions at between £12m and £18m, but it is worth bearing in mind that out-of-home trading had improved by late summer, boosted by the Chancellor’s Eat Out to Help Out scheme. Investors won’t get the full picture until annual results are released on Nov 26.

Britvic successfully navigated the introduction of the Government’s sugar tax and growth has been powered by low-calorie brands such as Pepsi Max of late. However, for the first time in a long time the stills business has some growth potential too.

Company followers at RBC, the bank, highlight the recently completed £240m supply chain investment, which should allow Britvic more flexibility in producing smaller pack sizes and individual servings that can boost its pricing power. As many school canteens are forced to remain closed for health and safety reasons, packed lunches have become the norm.

In the medium term, analysts at Morgan Stanley think Britvic is well positioned; they have pencilled in average underlying sales growth of 3.4pc a year for the three years to 2025. On the way there, net debt is likely to have nudged over two times earnings in the financial year just ended – well within prescribed borrowing covenants – but should fall away after that. This financial strength suggests the decision on this year’s dividend, deferred in March, won’t be all bad news.

Britvic derives about one third of sales from overseas. The recent disposal of some of its French business – including three manufacturing sites and the Fruité brand – indicates an ambition to do fewer things better and boost margins on the continent. It also looks poised to pick up a contract to bottle the energy drink Rockstar, which could add £25m to sales.

Earlier this year the brand was acquired by PepsiCo, which terminated its UK bottling deal with Irn-Bru maker AG Barr soon afterwards.

Questor first recommended Britvic shares in July 2017 and suggested that readers took some profits in March 2019 after a 34pc rise. Since then the stock has dropped sharply because of the first coronavirus lockdown and fears of the impact of a second.

The shares trade on 14 times forecast earnings for the current year, to September 2021, when the dividend should just about be restored to 2019’s level. Britvic has historically traded at lower multiples than many of its peers in the consumer goods world, which have also enjoyed a boost in grocery spending.

Even though British stocks remain out of favour, a combination of recent investment and market opportunity should mean that it finally gains more fizz.

Questor says: buy

Ticker: BVIC

Share price at close: 745.5p