- Operational efficiencies key during the pandemic
- Supply-side flexibility comes to the fore
The impact of the pandemic on the hospitality industry had clear and detrimental knock-on effects for beverage producers and suppliers after AG Barr (BAG) – manufacturer of the Irn-Bru energy drink – unveiled a 30 per cent reduction in reported profits for the year. Meanwhile, Ireland-based C&C Group (CCR), in a separate trading statement, demonstrated efforts to reduce its debt pile.
The key factor in responding to the crisis for drinks companies is how quickly they were able to find cost savings from a cost base that, by and large, is rigidly fixed. Under such conditions, it was notable that AG Barr posted a cash in-flow of £11.5m. The strong cash inflow and suspension of the dividend meant the company maintained a broadly unchanged return-on-capital-employed of 16 per cent.
Management booked a £10m impairment to its Strathmore water brand, sales of which were heavily impacted by the closure of hospitality venues.
Broker Investec expects the impact of the pandemic to continue for AG Barr into next year but forecast underlying pre-tax profits of £32.7m, giving earnings per share of 23.3p. The broker also upgraded profit forecasts for 2023 by 13 per cent £36.2m, giving EPS of 26p.
The results season underlined the varying degrees of dependency on the “on-site” drinks market. For AG Barr the on-site hospitality market makes up between 10-15 per cent of the total business. But it also seemed to help if companies did not have to manage their balance sheets as intensely as the operational side of the business.
While the pandemic posed unprecedented challenges for the sector, according to AG Barr’s chief executive, Roger White, this wasn’t so much about logistics as it was about externalities beyond management's control: “The basic business problem, from our point of view, was how to maintain a flow of product – the continuity of supply over demand. We could control the variables on the supply side of the business, whereas we had no influence on demand.” He added that the soft drinks group had maintained its payment terms with suppliers and offered some credit extensions to trade customers but that there had been no major adjustments needed to maintain positive cash flow.
Getting product into any sort of available market was the main reason that the group could maintain a positive cash position and allow an organic strengthening of the balance sheet.
C&C Group, which distributes brands such as Bulmer’s Cider, also grappled with the problem of how to squeeze savings out of its cost base. Its trading statement revealed an expected €18m (£15m) of cost savings for the year, in contrast to AG Barr which sits on net cash of £47.5m, C&C must service a significant net debt pile of €362m.
C&C’s trading statement bore all the hallmarks of management trying to maintain the financial stability of the balance sheet, as well as managing its basic business functions.
To preserve working capital, it has negotiated the timing of loan payments, extended supplier payment terms and temporary deferrals to tax payments in the UK and Ireland – €11m of which have now been repaid. It has also off-loaded non-core assets, with Tipperary Coolers sold for €7m, along with the sale of its US subsidiary, Vermont Hard Cider Company, to Northeast Kingdom Drink Group for $20m (£14.5m). The total net profits from the sales will be used to reduce net debt. Meanwhile, the directors and senior management have also taken pay cuts.
C&C and AG Barr provide an interesting contrast in the drinks sector between two companies with different approaches to growth. In normal times, both business models would work perfectly well, but under extreme circumstances, C&C’s leveraged balance sheet is clearly proving to be a significant burden. We maintain our hold recommendations for both, with a cyclical recovery in the offing, but AG Barr’s cautious balance sheet approach has more defensive appeal. Hold both AG Barr and C&C at 507p and 286p, respectively.
Last IC View: Hold, 426p, 22 Sep 2020
|AG BARR (BAG)|
|ORD PRICE:||507p||MARKET VALUE:||£ 568m|
|TOUCH:||506-512p||12-MONTH HIGH:||541p||LOW: 369p|
|DIVIDEND YIELD:||NIL||PE RATIO:||30|
|NET ASSET VALUE:||204p||NET CASH:||£48m|
|Year to 25 Jan||Turnover (£bn)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £90.5m, or 81p a share.|