Barr (A.G.) (BAG) Ordinary 4 1/6 pence

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AG Barr expects full-year revenue to come in at around £400mn, up roughly 7.6% on a like-for-like basis, as its broad mix of brands helped deliver a "strong" second-half performance.

Underlying pre-tax profits are expected to rise 13.8% to around £49.5mn, slightly ahead of prior market expectations.

Cost inflation has eased from the heights of the prior year. Coupled with ongoing investment plans aimed at improving its supply chains and margins, Barr has "confidence" in its long-term growth strategy heading into the new year.

Succession plans at the top have been announced, with Euan Sutherland named as the incoming CEO. He has previous CEO experience at Saga, Superdry and The Co-op Group.

He will replace Roger White on 1 May 2024, who has stood at the helm of Barr for more than 20 years.

The shares rose 1.1% following the announcement.

Our view

The full-year update highlighted the power of Barr's growing portfolio of brands. The first full year's contribution from the recently acquired Boost drinks brand saw sales jump significantly higher, up around 26% year-on-year. Ignoring this acquisition, like-for-like sales still grew at high single-digit rates - an impressive feat given the challenging macro environment.

AG Barr's other core brands have continued to perform well too. The group's leveraging those brands to spin out new products. The Rubicon name's been put on a new energy drink to sit alongside the new PWR-BRU energy drinks, which it hopes will help capture more of the growing energy drinks market.

The Funkin brand, which sells a range of pre-made cocktails to bars, restaurants and consumers at home, offers a genuine avenue for growth. Its ready-to-drink options were the star of the show this year and, thanks to continued consumer marketing, Funkin remains the UK's Number 1 cocktail brand.

While the group anticipates continued revenue growth, there have been a few words of caution to flatten expectations. Due to elevated levels of cost inflation and investment across the businesses over the past year, we expect to hear that margins have been squeezed when more detailed full-year results are announced.

Heading into the new year, Barr's focus remains on these investment plans, aimed at ramping up production and increasing efficiencies across its brands. This should help grow margins over the medium term, but in the short term, while this investment is taking place, margins are likely to remain under pressure.

Last we heard, the balance sheet was in great shape, despite the acquisitions of Boost and MOMA in recent years. A net cash position means there's firepower to pursue further non-organic growth opportunities if they arise.

Forfeiting short-term margins and profits, to invest in what it sees as high-growth areas, is a plan we can get behind. The valuation looks relatively undemanding in our eyes, especially compared to some of its peers. But execution is a key risk, and if the expected benefits are smaller or later than planned, Barr's valuation could be punished.

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, AG Barr's management of ESG risk is average. 100% of Barr's packaging is already recyclable, with clear on-pack messaging. The group has targets in place to reduce scope 1 and 2 emissions by 60% by 2030, relative to 2020 levels. However, the group's initiatives are not sufficient to manage all its risks. Disclosures of progress are poor, signalling a lack of accountability to investors and the public.

The Share Research team is ceasing covering of AG Barr. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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