AG Barr PLC (LON:BAG) shares lost their fizz in mid-morning trading on Tuesday after predictions of a “more challenging” year ahead for the soft drinks market overshadowed increased profits in 2018.
In its outlook statement, the FTSE 250 maker of Irn-Bru said the economic and political climate in the UK meant 2019 would be “another uncertain year for UK based businesses”, adding that for soft drinks this would be more challenging due to more regulation and “ever-changing consumer dynamics”.
READ: A.G. Barr expects 2019 profit growth but cautious on soft drinks sugar clampdown and Brexit
The uncertain outlook slightly dented investor sentiment, with shares dropping 1.3% to 767.2p.
The fall was in spite of an improved performance for the year just gone, with the company reporting a pre-tax profit before exceptional items of £45.2mln, 2.5% higher than the prior year, while revenues rose 5.6% to £279mln.
The revenue growth was a touch ahead of the 5% figure predicted in a trading update in January, as AG Barr seemed to shrug off the impact of a tax on sugary soft drinks as well as a shortage of carbon dioxide over the summer.
This had been boosted by the group’s increased volume share of the UK’s soft drinks market, which was up over 11% year-on-year.
The final dividend was hiked to 12.74p per share form 11.84p the year before, taking the total dividend 7% higher to 16.64p.
However, operating margins in the year were pinched by an ongoing investment programme and “suboptimal” trading conditions in the summer caused by what the company said was “unprecedented” demand due to the hot weather. As a result, margins dropped 66 basis points to 16.4%.
Roger White, the company’s chief executive, said that the group had “adapted well” to the changes in circumstances over the year and while the uncertainty across the UK economy was “likely to prevail for the foreseeable future”, the firm’s markets were “robust”.
“We have exciting plans to deliver across the Group and are confident of continuing to make further progress in the coming year."
House broker hails successful negotiation of “tricky year”
In a note to clients, analysts at AG Barr’s house broker Shore Capital said the firm had delivered “sound” full-year results and successfully negotiated a “tricky year of market disruption”.
“Growth has been volume led across the core carbonate brands with the group taking significant volume share – a direct reflection of the short term trading strategy to capitalise on the post-SDIL market environment.”
Analyst raises concerns over “rich” valuation
Nicholas Hyett, equity analyst at Hargreaves Lansdown, raised concerns that AG Barr’s valuation was “starting to look pretty rich” with a price-earnings (PE) ratio for 2019 of 23.8x.
This was “a slight premium” to peers in the sector, Hyett told Proactive, with fellow established soft-drinks firm Britvic Plc (LON:BVIC) trading at around 16x PE for the same period.
The figure is also above AG Barr’s own ten-year average PE of around 19x, he added.
PE ratios are the price of a company’s stock relative to its earnings, with higher multiples indicating investor confidence in a company’s growth prospects.
Hyett said that this multiple reflected “a fantastic record of execution that’s seen it steadily grow the dividend for decades”, however, warned that if Brexit “really hit the UK economy Barr could yet lose its appeal for investors”
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