Nichols: Costs eat into the Vimto maker's margins

Nichols (NICL) shares were marked up by 7 per cent after its adjusted pre-tax profit of £27.2mn came in ahead of the company-compiled market consensus, as the soft drinks maker raised its dividend on the back of strong cash generation. 

Overall revenue growth at the Vimto owner was muted as price rises were implemented to recover increased costs rather than drive profits, with the key UK packaged market (50 per cent of total revenue) up by only 1 per cent. Growth of 16.8 per cent in international packaged markets was the standout, a performance helped by new product launches and targeted marketing. 

The strategic review into the out-of-home business has resulted in a simplified business model. Out-of-home revenue fell by 3.4 per cent as progress was made with driving bottom-line growth – the division's adjusted operating profit was up by a notable 43 per cent. The pricing strategy meant that UK packaged and out-of-home volumes fell. 

Gross margin fell by 80 basis points to 42.3 per cent as a result of the sales mix and pricing action. The margin remains lower than the pre-pandemic baseline of 45.7 per cent in 2019, and management told Investors' Chronicle that "we see gross margins sticking at these levels going forwards". 

The company's cash generation strengths were apparent, meanwhile. Free cash flow was up 43 per cent to £20.9mn, while cash conversion rose from 72 per cent to 102 per cent year on year. Nichols has no bank debt, with net cash rising to £67mn. 

The shares are valued at 17 times forward earnings, a not insignificant discount to the five-year average of 22 times. But we are currently less bullish than broker Panmure Gordon on the idea that "there is a margin recovery story in play". Hold. 

Last IC view: Hold, 1,016p, 27 Jul 2023