Cocktails help drive AG Barr's growth

Investors in AG Barr (BAG) were hoping for positive news in the soft drink manufacturer’s half-year results to 1 August after Covid-induced falls in revenue and profits in January’s full-year results. At a high level they should be satisfied, given the scale of reported sales and profit growth. There was strong growth across all operating segments, and particularly for the Funkin cocktail brand. The dividend was reinstated, with a combination of ordinary and special dividends giving a 12p per share payout, with an implied yield of 2.3 per cent.

A cocktail isn’t the first thing that comes to mind when thinking about the manufacturer of Irn-Bru, but diversification has been key to the group’s growth. Funkin was acquired in 2015 and plays an increasingly important role in revenue generation: with £19m of sales it delivered 14 per cent of total group revenues, up from 7 per cent last year. You could argue that Funkin sales metrics were distorted because of the on-trade disruption in HY 2020, set against increased consumption of the pre-mixed drink at home, but group chief executive Roger White said that while on-trade Funkin sales growth of 230 per cent had to be put in the context of lockdown comparators, the results are “ahead of ours or customers' estimations”.  

A key part of the soft drinks market is the energy drinks subset, which outperforms the whole. AG Barr has tapped into this market with its Irn-Bru Energy and Rubicon Raw Energy products. The group has only a small foothold in this expanding market, and while AG Barr’s position is “growing both in terms of consumption and penetration”, White said he would like to go further. Further investment is planned in the Rubicon product.  

However, behind the headline numbers and growth story lurk warning signs.. Management is open about cost inflation concerns and “increased challenges across the UK road haulage fleet”, which is “impacting customer deliveries and inbound materials”. They emphasise that the half-year profit results were driven by one-off factors such as the hospitality sector reopening and that similar operating margin performance is not expected for the full year.

Broker Peel Hunt forecasts that EPS will continue to rise for the next two financial years to 27.2p in FY 2023. For now, a forward PE ratio of 24 times adjusted earnings is not unreasonable, but the market realises that underlying growth in the industry tends to be steady rather than spectacular, Funkin sales not withstanding. And AG Barr is not immune to wider supply chain problems. Hold.

Last IC View: Hold, 507p, 30 Mar 2021