Impressive half for AG Barr

AG Barr’s (BAG) defensive qualities were apparent in a half in which sales rose by almost a fifth and the dividend was hiked up by a quarter despite the challenging economic environment. Liberum analysts pointed earlier this year to the Irn-Bru maker’s “100 per cent branded portfolio, diversified channel mix and a loyal customer base”. Such attributes helped the company grow sales during the 2008 financial crisis, and are serving it well as we once again enter recessionary waters.

The top-line performance was solid, with the post-pandemic recovery of on-trade and out-of-home trading aided by both pricing action and volume momentum. Soft drinks (products like Irn-Bru and Rubicon) sales were up by 12 per cent to £131mn, while Funkin (cocktails and accoutrements) sales grew by 21 per cent to £23mn. Plant-based oat-milk maker MOMA foods, which the company invested in last year, posted an encouraging £4mn in sales – chief executive Roger White told Investors’ Chronicle that he expects MOMA to start contributing to profits over the next couple of years.  

Given rising cost pressures, profitability edging up against last year was a good result. Adjusted operating profit margin came in flat at 16 per cent, with cost inflation offset by revenue growth, pricing, and various cost-efficiency measures. Management expects margin dilution in the second half of the year, and forecast a full-year adjusted operating margin of 14 per cent as consumer confidence weakens and the cost situation gets tougher. But the pricing and cost-control tools at the company's disposal leave it in a relatively attractive position against the wider sector in this area. Looking ahead, the 3p per unit producer levy under the Scottish deposit return scheme (DRS) is an additional cost to watch when it comes in next year – broker Investec said this would have around a £3mn impact. 

Shore Capital said that the company “is a high-quality stock in our view, with pricing power that leaves it well placed for the tough consumer times ahead, though as growth opportunities rise AG Barr should become more than a safe haven”. The house broker has the shares trading at 16 times its earnings forecasts for the next two financial years. This is an undemanding rating, given it is a noticeable discount to the five-year consensus average of 21 times forward earnings, according to FactSet. And a strong net cash position, along with brand equity and pricing power, also supports the bull case. Buy.

Last IC View: Buy, 550p, 21 Jul 2022