Nichols hindered by hospitality arm

2022 proved to be a “challenging and unpredictable year” for drinks company Nichols (NICL), which was forced to juggle inflation, weaker consumer spending and strike action in Spain. This is not immediately obvious in its full-year results. Sales are up 14 per cent and, after a big impairment pushed the group into a loss in 2021, profits are back in recovery mode. However, a closer look at the figures reveals some niggling issues. 

Nichols’ UK packaged business produces Vimto, as well as other squashes and ready-to-go soft drinks. The division sits at the heart of the group, generating about half of total sales and the lion’s share of profits. 2022 was tough, however. While sales rose by 3 per cent, volumes declined as a result of the cost of living crunch, resulting in a negative gross profit impact of £0.9mn.

The big sticking point, however, is Nichols’ ‘out-of-home division’, which provides dispensing equipment and soft drinks for venues like cinemas, holiday parks and pubs. (Think coffee machines and slush makers). Management has been unhappy with this side of the business for some time, and the division was largely responsible for last year’s statutory loss. 

Demand for out-of-home products bounced back well in 2022, with revenue rising by 43 per cent to £44.3mn, according to broker Singer Capital Markets. (Annoyingly, Nichols itself lumps its out of home performance within its packaged performance. It will start segmenting the two from 2023.). However, Singer said that the division generated a loss before tax of £0.7mn, which “in the context of around £19mn capital employed is clearly disappointing”.

In contrast, Nichols’ international arm seems to be thriving. The Middle East is an important market for the group, as Vimto is popular during Ramadan in Saudi Arabia, and sales jumped by 20 per cent to £11.8mn in the period.  Management noted a strong performance in Yemen in spite of the civil war. The business is also performing well in Africa, where sales rose by 15 per cent to £18.9mn.

In an ideal world, many of the external pressures facing Nichols will have eased by the second half of 2023. Moreover, management has a plan for its struggling, capital-intensive out-of-home division, which includes a few strategic exits. It’s still early days, however. Hold.

Last IC View: Hold, 1,240p, 27 Jul 2022