Britvic (BVIC) – Squeezing out good results

Britvic (BVIC) – Squeezing out good results

Shares in the drinks company Britvic (BVIC) have broken out to a new high following the publication of full-year results (latest share price 857.5p, market cap £2,268 million). I’ve been weighing up whether this company deserves a place in a quality-focused share portfolio.

A Tasty Collection

Let’s remind ourselves of some of the group’s owned brands:

  • Robinson’s
  • J20
  • Tango
  • Gatorade

From Ireland, Britvic has:

  • Ballygowan
  • MiWadi
  • TK Lemonade

You may not be familiar with the entire portfolio, but most people will be familiar with most of the names.

In addition to its owned brands, Britvic also bottles and distributes Pepsi, 7Up and Lipton Iced Tea on behalf of PepsiCo. We could compare that with the operations of the FTSE-100 constituent, Coca-Cola Hellenic Bottling Corporation (CCH).

Britvic is also active in France and Brazil with a couple of local brands in each of those markets. And of course there is wide international distribution.

Industry Headwinds

Britvic CEO Simon Litherland is pleased with the company’s results this year in the context of some complicating factors:

  • sugar taxes in UK & Ireland
  • a shortage of CO2
  • buyers consolidating/going out of business (e.g. Palmer & Harvey)

Sugar taxes have been a positive factor for low-sugar and zero-sugar drinks. For example, the dilutes under the Robinson’s brand have benefited from the switching effect as sugary drinks get more expensive.

There has also been a premiumisation effort at Robinson’s with the addition of Robinson’s Creations. The packaging tells the story:

(Source: Robinsonssquash.co.uk)

The broad Britvic portfolio has a heavy weighting in low and zero sugar drinks, and it has reduced the sugar content of J20, helping it to navigate through the new sugar taxes.

Other issues – the C02 shortage has been resolved and problems with the supply chain were temporary, so the various challenges faced by the industry look to have passed for now.

Counter-balancing the complications, a hot summer in Western Europe will have given sales a boost.

The Numbers

Key numbers from the results are as follows:

  • Volume sold +1.6% to 2.4 billion litres
  • Revenue +2.7% organically to £1,504 million
  • Basic EPS +5% to 44.4p
  • adjusted net debt increases by £73 million to £575.5 million. (The adjustment looks reasonable to me – it relates to derivatives that hedge against the debt’s interest rates).

Free cash generation is poor currently, as the company is in its “capital investment phase” of the “business capability programme”. This sees it exiting Norwich and moving the production of Robinson’s and Fruit Shoots to sites in London, Leeds and Rugby. Acquisitions have also been a drag on cash.

  • In FY 2017, £200 million was spent on the purchase of PPE and on acquisitions.
  • In FY 2018, the corresponding figure is £175 million.

This means that almost the entire operating cash flow figure has been reinvested each year.

Dividends and other cash flow needs have therefore been funded via increasing debt, as mentioned above.

Valuation – if we add adjusted net debt (£575.5 million) to the market cap, we have an enterprise value of c. £2,845 million. This produces a trailing EV/EBIT ratio for Britvic of 17x. This looks approximately the same as that for smaller rival Nichols (NICL).

Balance sheet – not overly attractive. Net assets are £377 million, but tangible net assets are negative.

ROCE – this is much more favourable. Using operating profit and average tangible capital employed (defined as PPE plus net working capital), I estimate that Britvic’s ROCE was a whopping 37% in FY 2018.

This is evidence that the company’s brands are very valuable and/or that its tangible assets have been deployed very well. Note that my calculation is generous in the sense that it ignores the presence of large intangible assets. It “forgives” the company for the heavy price of historic acquisitions.

My viewI’m biased in favour of successful drinks companies, as they tend to have a super combination of profitability and longevity. Another attraction with Britvic is my familiarity with the specific brands which it owns and manages. The valuation seems reasonable, though I do have some question marks about the expanding balance sheet. On balance, I have a favourable view and this is on my watchlist for a potential purchase at some future date.

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