A profit warning took the fizz out of the share price of Vimto maker Nichols PLC (LON:NICL) on Tuesday morning.
The company said the recent escalation of hostilities in Yemen has resulted in the supply route to its Yemeni distributor being blockaded.
Adjusted group pretax profit to be in line with 2016
As a consequence, management currently expects adjusted group profit before tax for 2017 to be in line with 2016; prior to Tuesday’s announcement, the market had pencilled in a figure of £32.4mln, up from £31.5mln in 2016.
Things are going much better on the home front for the company’s flagship Vimto brand, with sales in the first 11 months of 2017 up 9% year-on-year, which is significantly ahead of the market’s growth rate of 2.3%.
Internationally, the business in Africa is expected to deliver full-year revenues up more than 20% of last year.
For the group as a whole, sales in 2017 are still expected to be up year-on-year, although obviously the inability to supply its customer in Yemen will have an effect on the top line.
“In our international business, we anticipate the strong growth trend in Africa to continue in 2018; however, the current conflict in the Yemen coupled with some reported slowing in the Saudi economy indicates that sales to the Middle East region in the year ahead are likely to be less than previously anticipated.
Shore Capital downgrades stock
"As a result, management currently expects low single digit percentage profit growth in 2018 in comparison to the current year,” the company said.
Shares in Nichols were down 7.4% at 1,472p in late-morning trade, having fallen as low as 1,386p at one point.
Shore Capital downgraded the stock to 'sell' from 'hold' after what it termed "a slightly disappointing statement".
Having exposure to international markets such as those in the Middle East is likely to see some volatility in trading from time to time, the broker noted.
"For us it does not take away the fact that Nichols remains a high-quality business with a strong track record," the broker asserted, but Shore sees limited growth potential on the horizon at the moment.
"We believe the shares are now overvalued and current valuation rating is likely to be tested," it added.
On the plus side, UK sales of Vimto are vibrant.
"We expect this has been driven by the 500ml sport cap RTD format and the new Vimto variant – Remix. This strong top-line momentum is helping offset some input cost pressure which was communicated previously," the broker added.
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