Britvic breaks out the bubbles

Britvic, the UK’s second-biggest soft-drinks manufacturer, looks well  hedged against any cultural shift away from sugar. Its main strength lies in a portfolio packed with big-brand, low-or-no sugar beasts such as J2O and Robinsons, as well as drinks licensed from PepsiCo, such as PepsiMax. What's more, the shift in the consumer landscape may prove less extreme than many had expected. Data insights agency Nielsen revealed in August that 62 per cent of UK consumers claim not to have altered their habits at all in response to the soft drinks industry levy (SDIL) – inelastic demand is no bad thing for Britvic and highlights the defensive attractions of the brand portfolio.

Consumers aren’t just rejecting sugar. They’re also turning against alcohol – especially the young. Research in the BMC Public Health journal reveals that the proportion of 16- to 24-year-olds who don’t drink alcohol rose from 18 per cent in 2005 to 29 per cent in 2015. Alcohol companies are panicking, and scrambling to produce alternatives. The innovative Britvic has launched its own premium alcohol substitutes in the form of its Monte Rosso and Thomas & Evans brands. Its other brands should benefit from increased teetotalism, too.

Britvic has been investing in its infrastructure as well as its brands. It’s coming to the end of a three-year, £240m investment programme that included £100m towards a new automated warehouse in Rugby. The business will have three production facilities, in London, Rugby and Leeds, boosting efficiency and reducing road miles. Bringing capital expenditure back down to more normal levels should see free cash flow surge at the same time as increased efficiency boosts margins.

Broker Berenberg expects capital expenditure to drop from £144m in 2018, to £73m in 2019, then £64m and £65m in the two years after that. And while the broker forecasts unchanged underlying operating margins of 13.7 per cent in 2019, margins are expected to jump to 14.5 per cent in 2020 and 14.6 per cent in 2021, which is reflected in the jump in forecast earnings per share in the accompanying table.

Meanwhile, the shares paltry sub-2 per cent free cash flow yield in 2018 is expected to leap to 5.3 per cent this year, followed by 7.3 per cent in 2020 and then 7.8 per cent. The cash generation should support strong forecast dividend growth, too, and transform the balance sheet, which has seen debt grow to the top end of management's target range of 2.5 to 1.5 times cash profit. The ratio is forecast to be below target by 2021.

Britvic does still face some challenges, but these are also sources of potential improvement and further upside. Specifically, it needs to turn its fortunes around in France and Brazil, where revenues dropped last year. Poor weather impacted syrups in France, while an unsettled consumer environment in Brazil has affected sales there.

The weather played its part back home, too, with the hot summer causing the shortage in carbon dioxide. Britvic needs to insulate itself from meteorological uncertainties. Its ‘healthier planet’ strategy, which helped it to reduce its gas consumption by 8 per cent last year, may do just that. Meanwhile, Brexit is a risk, although the defensive quality of its brands should put it in a better position than many consumer-facing stocks to deal with any any economic weakness.