Britvic was first floated in December 2005 at 230p by its previous owners (Whitbread, InterContinental, Allied Domecq and PepsiCo). Today it is Britain’s second-largest soft drinks supplier behind Coca-Cola. It owns a stable of iconic brands (representing 50% of turnover), such as Robinsons squash, Tango, and alcoholic mixers. It also bottles drinks for Pepsi, distributes other drinks, such as Lipton Ice Tea, and derives 19% of its turnover from Ireland.
All told, Britvic has a 12% share of the £6.1bn take-home drinks market and 48% of the £2.4bn licensed trade (eg, pub and restaurant) sector – which together are growing at 2%-3% a year.
So I don’t think Britvic is a bad business. What I’m far less keen on is its fizzy valuation, its £366m debt burden (equivalent to a stretched 2.4 times earnings before interest, tax, depreciation and amortisation, or Ebitda), along with its £85m pension deficit. True, the firm does not have to renegotiate its banking facilities until May 2012, but that doesn’t mean it can pop open the champagne.
Once the general election is out of the way and austerity measures kick in, shoppers will undoubtedly rein in their purse-strings again. Many will downgrade from branded drinks to cheaper alternatives, such as supermarket own-label varieties. So drinks groups will have to slash prices and offer two-for-one deals to shift stock from crowded shelves. As margins are squeezed, profits will drop and Britvic may have to chop its dividend or opt for a rights issue as a condition of renewing its loan agreements in two years’ time.
Britvic (LSE: BVIC), rated a BUY by Nomura
If you don’t believe me, just look at what’s happening across the Irish Sea, where all of Britvic’s operations are facing very tough conditions in line with Ireland’s pear-shaped economy. Irish sales were down a whopping 10% in the first quarter of 2010, with sales of Ballygowan bottled water tumbling as cash-strapped consumers switched to tap water. And trading is not expected to recover soon. The International Monetary Fund reckons that GDP will shrink by 1.5% in 2010, with unemployment remaining flat at 13.4%.
Even if Britvic manages to maintain its juicy 11.2% operating profit (Ebita) margins in the event of another slump,
I still believe the stock is too dear. The City expects 2010 sales and underlying Ebita of £1,026m and £129m respectively, rising to £1,068m and £138m in 2011 – putting the shares on stretched enterprise value (EV)/Ebita ratios of 11.6 and 10.9 for this year and next. I would value the company on a through-cycle multiple of ten. Assuming a sustainable margin of 10% and adjusting for the debt and pension deficit, that equates to an intrinsic worth of around 265p.
Yes, the recent hot weather and the forthcoming World Cup should help results. And there is always an outside chance that the group may be snapped up by a foreign buyer – perhaps even by Pepsi, who might be interested in owning its British supply chain. But from a fundamentals perspective, given the squeeze on disposable incomes coming down the track, I think cautious investors should sell. Interims are scheduled for
18 May.
Recommendation: SELL at 481p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments