C&C ripe to re-rate

There's no doubt that trading conditions remain challenging, but we think C&C offers promise, particularly in light of the group's strong cash generation and the steps being taken to transform its brands division to a low-cost operating model. With a dividend yield in excess of 3 per cent and an enterprise-to-cash-profits (EV/Ebitda) multiple of just 9.6 times - a quarter below the peer average - we view C&C as a value opportunity.

The group's underlying full-year figures were broadly in line with the consensus, although the aforementioned €150m (£107m) impairment charge pushed reported earnings into negative territory. Intensifying competition, including the continued growth of a local craft cider movement, has meant C&C has struggled to maintain market share across the Atlantic and the write-down was exacerbated by the strengthening of the dollar against the euro during the period.

However, C&C is taking these problems in hand and has invested in a state-of-the-art cidery in Vermont, which will help to reduce operating expenses. It has just launched its first digital advertising campaign for Woodchuck Cider in a bid to re-engage US cider drinkers with the brand. The group has also consolidated its C&C Brands business and has accelerated product investment and development in the US, which should help to stabilise the positioning of C&C's products.

Retail pricing pressures have also weighed on top-line growth for C&C's core businesses in Ireland and Scotland, which account for 86 per cent of operating profit. A business mix switch away from pub sales to lower-value shop sales fed into this and the first quarter sales suffered due to poor spring weather. Nonetheless, these markets still delivered modest earnings growth last year and performance of the iconic Tennents beer brand provided cause for optimism. The integration of C&C's new Irish subsidiary, Gleeson, has now been successfully completed, although the group anticipates some volatility in revenue as "old arrangements cease and new ones commence". And the group reports solid progress with Scottish drinks wholesaler Wallaces Express, although beefed-up drink-driving regulations north of the border did drag on sales growth.

C&C's balance sheet remains solid. The group has updated its €450m multi-currency five-year syndicated loan and year-end net debt represented just 1.1 times cash profits. To improve capital efficiency, management plans to increase the multiple to two times by 2018, implying net borrowings of about $300m (£192m).

Although recent trading has proved challenging, the group has delivered strengthening cash flows. Last year, cash profits to free cash flow (FCF) conversion increased from 41 per cent to 59 per cent. Broker Investec Securities expects C&C's FCF yield to rise from 6.6 per cent to 8.2 per cent through 2015 to 2018. Strong cash flows have enabled C&C to fund a series of double-digit dividend increases and there's every reason to think that this largesse is set to continue. Over the medium term Investec expects the payout ratio to grow to 50 per cent against a current rate of 42 per cent.