AG Barr grows volume despite price rises

Consumers are cutting back on cocktails, but are drinking more soft drinks and oat milk. At least that is the picture presented by AG Barr’s (BAG) half-year results. The Irn-Bru maker saw revenue rise, but earnings per share slip fractionally as rising costs and the loss of capital allowance tax cuts dragged on profits.

Soft drinks was the best-performing division and saw revenue rise 38.9 per cent to £182mn. A large part of this growth was driven by the Boost acquisition in December. On a like-for-like basis, total revenue rose 10.4 per cent to £174mn. Boost has driven sales growth but its lower margin contributed to the fall in the operating margin by 3.7 percentage points to 12.5 per cent.

The cocktails business, Funkin, was the only part of the group that underwhelmed. Revenue rose just 2.6 per cent, which was below the rate of inflation, which implies a drop in volume. Chief executive Roger White told Investors’ Chronicle that students in particular increased cocktail purchases from late night stores when they were allowed to party after the pandemic. However, with the cost of living increasing, consumption is now being curtailed.

The company hasn’t passed on all its rising costs in price rises, meaning it has been able to take market share across its categories. House broker Shore Capital estimates that 75 per cent of revenue growth came from price rises, with 25 per cent from volume growth. Operating margins are expected to stay suppressed for the rest of the year before improving next year.

Shore Capital currently has the company trading on a 2024 price/earnings ratio of 15 and a free cash flow yield of 4.7 per cent. At this price, AG Barr’s consistent revenue growth and cash flows look affordable. And all this despite the mixed summer weather. We stick to buy.

Last IC View: Buy, 526p, 28 Mar 2023