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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (208)  | Author's Website |

Scottish Soda Bottler Down With Brexit and Sugar Tax

A.G. Barr has the contract for Snapple and Rockstar

December 29, 2016 | About:

A.G. Barr (LSE:BAG) is a Scottish bottler of soft drinks, water and fruit drinks. The stock has sold off with Brexit concerns and a sugar tax that will be instituted in England in 2018.

The stock trades for 5 pounds ($6.13), and the market cap is 578.55 million pounds. Earnings per share were 32.3 pence per share for a price-earnings (P/E) ratio of 15.5. The dividend is 14 pence, and the dividend yield is 2.8%. It takes $1.22 to buy 1 pound. I usually don’t write about stocks that don’t have an ADR (American Depository Receipt) but made an exception.

Sales grew from 238 million pounds in 2013 to 254 million pounds in 2014 then grew to 261 million pounds in 2015 before falling to 259 million pounds in 2016. The fiscal year ends in January. Net income grew from 25 million pounds to 34 million pounds over that time frame. The profit margin is 14.81% and return on equity is 22.62%. Both are very high. By my calculations, free cash flow was 30 million pounds over the last four quarters and the free cash flow yield is 5.18%. Again, very high and very profitable.

The balance sheet shows 7 million pounds in cash and 59 million pounds in receivables. The liability side shows 58 million pounds in payables and 14 million pounds in debt. The balance sheet is solvent. Management has used the strong free cash flow to pay down debt from acquistions.

The fruit drinks and soft drinks are sold under these names: Barr, funkin, IRN BRU, omj, Sun exotic, Strathmore water, Tizer and St. Clements. I’ve never heard of any of these, and I’ve been to England twice. Barr also distributes Snapple and Rockstar energy drinks. I have heard of those. The Snapple contract commenced in 2015 and lasts for another nine years. Almost all sales are from the U.K. I don’t know if I’ve ever come across a drinks group that is wholly focused on its domestic market. The Rockstar agreement commenced in 2007 and ends in 2024.

For the first half of 2017, revenues were down 2.8%. In regards to Brexit, company management said, “We anticipate the recent reduction in the value of Sterling, if sustained, will lead to higher input costs across a number of our key commodities. We currently forecast this to have a year-on-year impact of circa 3 million pounds to 4 million pounds in 2017; however we are taking action to offset this cost where possible.”

Like Britvic (LSE:BVIC) which we looked at last week, Barr is decreasing the amount of sugar in its products. Britain is instituting a sugar tax in 2018 which Barr is none too happy about. The executive team and board have a lot of experience working for brewers, liquor companies and big multinational corporations. They seem to know what they’re doing. Britvic (what I call British Pepsi) and Barr almost merged in 2013.

The company unloaded its underfunded pension plan on Canada Life. The agreement covers 100 employees, had 107.3 million pounds in assets and had a deficit of 25 million pounds. A plan to cut 10% of its workforce, 90 employees, was announced in September.

HSBC has put a target price on Barr of 5.33 pounds. This article from Seeking Alpha earlier this year discusses Barr and its acquisitions.

I like Barr. We’re not going to buy shares as we own Britvic and C&C (CCGGY), the Irish brewer of ciders and old-style English beers. Barr is profitable, very solvent, has a product with a strong brand name, and has been growing sales (except this year). It would make a great acquisition.

Disclosure: We own C&C and Britvic.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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