Fevertree’s first-half revenue was broadly flat at £172.9mn ignoring currency impacts, which fell short of market expectations.
Double-digit revenue growth in the US and the Rest of the World was offset by declines in the UK and Europe, where unfavourable weather in the second quarter and the timing of shipments weighed on performance. Despite this, Fevertree gained market share across all regions.
Underlying operating profit rose from £0.6mn to £12.2mn as shipping rates, energy costs, and wider inflationary pressures eased.
Free cash flow improved from an outflow of £7.3mn to an inflow of £22.1mn. Net cash, including lease liabilities, was £59.7mn at the half-year mark.
Markets are now expecting full-year revenue to grow by 2-3%, down from the 8% growth management guided to at start of the year.
An interim dividend of 5.85p per share was announced, up 2%.
The shares fell 6.7% following the announcement.
Our view
Fevertree’s first-half sales fell short of market expectations, causing the valuation to take a hit on the day. Despite the shortfall, Fevertree did manage to gain market share across all the regions it operates in.
US growth looks especially healthy, and despite already being the group's largest region by sales, we think there's a lot further to go, given the vast size of this market.
Fevertree continues to expand its drinks portfolio with new products, and non-tonic mixers have grown to around 42% of total sales. These new offerings open the door to different types of drinkers, drastically increasing the number of customers it has to go after. We see a long runway for sales growth if it can execute well here.
To help make consumers aware of these new offerings, Fevertree’s not held back on advertising. Marketing spend in the first half was almost 10% of total sales, and there’s little sign of the group letting up on this front.
Profitability has improved, mainly through price increases and lower glass and shipping costs. Prices on many of its energy contracts for next year have been locked in too, meaning there should be no nasty surprises in the near term. The focus now shifts to ramping up production and improving efficiencies to help keep margins moving in the right direction.
But there are some challenges to be wary of.
UK sales continue to trend in the wrong direction. It turns out there is a cap on how much premium tonic you can sell, and it looks like Fevertree has reached it in its home market. Successful international expansion will be critical to continued growth.
The economic backdrop is looking a touch brighter than it did a year ago. But consumers' budgets remain stretched, so any unexpected shocks could see consumers trade down to cheaper alternatives if future price hikes aren't managed delicately.
The balance sheet is in good shape thanks to low debt levels, and there’s currently a prospective 2.1% dividend yield on offer. Given the amount of cash on the balance sheet, management has hinted that increased shareholder returns are on the cards in the new year. More details will come alongside full-year results, but a special dividend is the most likely option in our eyes. As always, no shareholder returns are guaranteed.
We're pleased to see momentum has turned positive. But despite the recent decline, the valuation still looks quite high to us. We'd like to see continued signs that overseas expansion is boosting the bottom line before we get excited about this mixer maker.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Fevertree’s management of ESG risk is average.
The group doesn’t use plastic bottles but instead uses glass or cans from a portion of recycled materials. As such, the group’s products are completely recyclable, however, they are energy-intensive to mould and make. Fevertree also claims its range of mixers sold in the UK are carbon neutral. However, no concrete scope emission reduction targets appear to be in place.
Fevertree key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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