UK Edition
Questor: Look beyond the sugar tax to see Britvic’s true potential as a major global player
The middle weekend of Wimbledon fortnight is a high point in Britvic’s marketing calendar. All those gratuitous shots of Robinsons on Centre Court; all those thirsts that must be quenched after some heart-stopping rallies. At 83 years, Robinsons possesses the second-longest Wimbledon brand tie-up after Slazenger. Yet just because the squash remains synonymous with summer tennis doesn’t always translate into rising sales.
In fact Britvic’s so-called “stills” division – including Robinsons, J20 and Fruit Shoot – has been the laggard of late, with sales declining 2.6pc in the half year figures released in May. In an attempt to cope with rising costs, Simon Litherland, the chief executive, has aimed to put value ahead of volume to protect profitability. He reported Robinsons had returned to volume growth thanks partly to the success of Squash’d, the brand’s super concentrate pouch.
There was better news from its carbonates division, where Pepsi, led by the Pepsi Max variety, grew revenue and gained market share. Britvic has been Pepsi’s sole bottling partner in the UK for 30 years. The arrangement also covers 7UP and Mountain Dew. Both sides are at pains to say it continues to be business as usual even though PepsiCo is selling its 4.5pc stake in Britvic.
Where the world is changing is around the sugar tax that will be levied on soft drinks from next year in a government attempt to tackle childhood obesity – although the industry queries whether taxes really deter consumption. The levy’s two bands – for total sugar content above five grams per 100ml or eight grams per 100ml – promise to drive up the price of a can of Coca-Cola by around 8p. Drinks makers have reacted so fast by launching low-sugar alternatives or reformulating traditional recipes that the initial tax forecast of £520m a year has been revised down to £400m.
Phil Carroll, an analyst at Shore Capital, believes that Britvic’s portfolio is already 68pc exempt from the sugar tax, with a target of being 72pc exempt by next spring. It is difficult to measure the financial impact from 2018 onwards. Britvic will pass on the tax to the retailer which may be passed straight to the consumer. Shore Capital’s worst case scenario is “moderate volume loss” spread over the next two financial years. But that does not translate into a profit hit. Mr Carroll predicts adjusted pre-tax profit will dip from £157.9m to £153.9m this year before recovering to £163.2m and £176.6m subsequently.
Meanwhile, Mr Litherland is trying to improve performance and is halfway through a three-year £240m programme to soup up the supply chain that has seen investment go in to the Leeds, London and Rugby factories. With a stock market value of £1.9bn, Britvic is the number one supplier of still soft drinks in the UK and number two in fizzy.
Less well known is that it derives 40pc of sales internationally and has a presence in France and Ireland. Fruit Shoot sales in the US have been encouraging following the launch of the multi-pack last year. The overseas proportion is expected to carry on growing. Britvic recently acquired Brazilian juice firm Bela Ischia for £54.5m.
Pricing pressure means takeover activity has swept through some of the supermarket aisles but it appears the company is pursuing an independent future. Gerald Corbett, the chairman who tried to broker a tie-up with Irn-Bru maker AG Barr in 2013, has announced he is stepping down.
For the third quarter trading update due on July 27, analysts at Jefferies have pencilled in 4.4pc underlying growth in group revenues. That would mark an acceleration from 3.7pc at the half year and is thanks in part to better weather this June. Like Wimbledon before the retractable roof, rain really does stop play in this category. A good summer is worth as much as £5m.
Even without consulting the weather, investors like what they see. Britvic shares have bubbled up 24pc so far this year. They have further to go. At 13 times next year’s forecast earnings, the stock trades at a sharp discount to rivals AG Barr and Vimto maker Nichols. There is uncertainty ahead, but Britvic’s portfolio and geographic spread mean it is well positioned to quench shareholders’ thirst for value. Buy.