AG Barr posts strong sales growth but margins contract

AG Barr (BAG) shares were marked down by 3 per cent after the Irn-Bru purveyor warned of a “short-term impact on operating margins” from cost headwinds and the dilutive impact of last December’s acquisition of Boost Drinks. 

Profitability pressures were evident in the year as supply chain cost inflation and higher investment levels took their toll on margins. Gross margin fell by 390 basis points to 40.3 per cent and the cash profit margin was down by 240 basis points to 17.7 per cent.

But this was still a solid year for the business, with attractive brand equity underpinning growth despite cost-of-living pressures. The chunky revenue uplift, with soft drink and cocktail solutions sales each climbing by 16 per cent to £267mn and £43mn respectively, was driven by both pricing action and volume growth. The Rubicon brand performance was a standout – sales were up by more than a fifth and volumes grew by 8 per cent.

And there could be more to come on the acquisition front after the purchase of Boost, which contributed £7mn of revenues and £1mn of gross profit over two months, and the rest of the equity in oat milk business MOMA in the year.

Chief executive Roger White told Investors’ Chronicle that the company’s “focus is on organic growth, but with the net cash position on the balance sheet and market conditions the way they are, the board is alive to more opportunities”.

The results also touched on the deposit return scheme (DRS) in Scotland, which is set to go live in August despite industry concerns. AG Barr noted that the scheme, which if implemented in its current form will add a 20p deposit to alcohol and soft drinks in single-use containers, has “the potential to impact consumer purchasing behaviour.” New SNP leader Humza Yousaf has already clashed with the Scottish Greens over potential changes to the regulations. Watch this space.

The shares trade at 17 times forward earnings, according to the consensus FactSet position, below the five-year average of 20 times. This rating looks attractive for a company which, as house broker Shore Capital noted, has good prospects of a “margin rebuild and more dynamic growth over the medium to long term”. And in the short term, the board remains confident that management expectations for revenue and profit growth in its 2024 financial year will be achieved despite cost challenges. Buy.

Last IC view: Buy, 494p, 27 Sep 2022