Nichols shows signs of recovery but pandemic uncertainty persists

Nichols' (NICL) half-year results showed signs of recovery from a pandemic-disturbed 18 months. Promisingly, it has managed to maintain a net cash position of £47.4m, which is evidence of a prudently-run business during a uniquely challenging period. The main question now is how quickly it will be able to recover its out-of-home sales (OoH) and whether its rising supply chain costs prove to be transitory – two factors that are somewhat out its control.

The company has invested heavily in its OoH business in recent years, including the acquisition of DJ Drinks in 2017 and Adrian Mecklenberg in 2019. Organic growth has also been driven by heavy investment in frozen drink dispensers and it has signed contracts with Coca-Cola and Iron Bru as key brands. Middle East Vimto sales remained resilient through Ramadan, despite tax issues and the impact of the pandemic.

The revenue from OoH was broadly in line with H1 2020, when it was initially hit by lockdowns, and the hope is that the UK’s successful vaccination programme will generate an uplift in H2. However, the spread of the Delta variant and the removal of government support for hospitality could push this further into the future. The upside of this situation is that it is looking for acquisitions and it could use its cash pile to get some assets on the cheap, which would leave it well placed when demand does finally return.

Its house broker N+1 Singer expects FY22 PBT to be 82 per cent of the pre-pandemic FY20 estimate of £29m.

Nichols is a well-run business with strong brand recognition, and a history of good cash generation, but it may require a little patience to see it return to pre-pandemic performance. Hold.

Last IC View: Hold, 1200p, July 2020