Concerns over the UK sales slowdown at Fevertree Drinks PLC (LON:FEVR) are “overdone and misplaced”, says Shore Capital, suggesting fair value for the shares is more than 30% higher than current levels.
Last month Fevertree reported a big slowdown in growth in the first half of the year, with sales up 13% six months to the end of June, versus top-line growth of 45% a year ago.
This slowing, mostly in the current main market of the UK, was largely blamed on the weather.
Case for the defence
But ShoreCap reiterated its ‘buy’ recommendation on Thursday with a fair value of 2,900p and a bull case of 3,800p, saying Fevertree’s footprint amongst the large UK retail trade may be mature, but saying there was still "room for growth" but in its rate of sale, SKU [stock keeping unit] expansion and innovation, not to mention the distribution gains in convenience and the on-trade reported in the interims.
Addressing the emerging presence of new premium mixer entrants in both the off and on-trade, ShoreCap said it “should not necessarily be associated with growing brand loyalty or a high rate of sale, whilst share is also mostly coming from mainstream and private label”.
Bolstered by a broad portfolio and geographic reach, a strong brand in the consumer and trade side, Fever-Tree has looked to consolidate its first-mover advantage with more than 300 co-promotions with spirit companies in the first half of 2019, including a recent global agreement with Diageo to co-promote Fevertree with its spirits, the ShoreCap analysts said the brand was “the natural partner of choice of the leading spirit brand owners”.
Global growth story
Indeed, the analysts said they believe the “global, wider category, long-term structural growth story” was underappreciated by the market.
They are encouraged by the recent behind-the-scenes progress in the US and the premiumisation trends that continue to develop in Europe, saying that both regions are “emerging as growth engines to succeed the UK with a larger end-game at stake, underpinning multi-year mid-teen revenue growth”.
ShoreCap expects an acceleration in growth across the US and Europe in the second half, which should reassure investors of the medium-term story.
The shares, which have fallen more than a third since the start of May, were up almost 3% to 2,144p on Thursday.