Cube Midcap Report (27 Nov 2019) – #BVIC #BATS

Cube Midcap Report (27 Nov 2019) – #BVIC #BATS

Good morning!

Finished at 2.15pm.

Other news (not covered in detail here):


Britvic (BVIC)

  • Share price: 988.5p (+0.4%)
  • Market cap: £2,620 million

Final Results

Please note that I have a long position in BVIC.

How time flies! I’ve been a shareholder here for nearly a year already.

In the UK, Britvic owns some terrific brands (J2O and Robinsons standing out in particular) and it exclusively makes and markets drinks for Pepsico (Pepsi, Gatorade and 7Up). It also owns some prestigious drinks brands in Ireand (TK, Ballygowan) and is active in France, Brazil and elsewhere.

I bought into it last year on the grounds that it was a) a very high quality drinks business and b) seemed to offer good value, relative to its safety. You can read my article on this website in November, shortly before I opened a position in it.

Let’s dive into these results.

  • revenue +1.4% at constant exchange rates
  • adjusted EBIT +4.4% to £214 million
  • PBT down 31% to £81 million, after £84.6 million of adjusting items.

There is an element of trust needed, that the adjusting items are reasonable and non-recurring.

The primary adjusting iems are:

  • strategic restructuring £33 million (versus £40 million last year).

It’s reasonable to be nervous about this. How can we be assured that the company won’t need to have another “business capability programme” before too long?

Closing the site in Norwich has been expensive, that’s for sure. But I will be looking for Britvic’s restructuring costs to wind down in 2020.

  • impairment of assets held for sale £31 million (versus zero last year)

Britvic is selling its juice manufacturing sites in France, its private label juice business and the Fruite brand. This has necessitated a writedown.

The introduction of a new law in France had a “major impact”. This law restricted the amount of promotional activity which can take place, forcing Britvic’s drinks to be sold at higher prices and causing a reduction in volumes.

By selling these assets, Britvic will look to create “a smaller but higher margin business… enabling the local management team to focus on growing our profitable brand portfolio“.

  • acquisition related amortisation £10 million (versus £11 million last year)

Britvic’s balance sheet has a very chunky (£427 million) portion of intangible items. Gradually writing these down is to be expected, and the charge is similar to last year.

My view on the adjusting items: the only one which really worries me is the strategic restructuring expense. In 2017, this was £25 million. So there have been at least three consecutive years of heavy restructuring expenses. These need to come down immediately, or I will assume they are now a permanent feature of Britvic’s results!

Two cheers for Britvic

The overall performance is OK, without offering investors any particularly wonderful news.

For GB carbonates, growth from low sugar and zero sugar brands compensated for the decline in full sugar brands. This was exactly as hoped for, following the introduction of the sugar tax.

For GB stills, volume declined 4.1% as this segment had been boosted last year when carbonates were in short supply, due to a shortage of carbone dioxide. In the on-trade, J2O suffered a decline.

In France, volumes and revenues were both down around 9%. Britvic is going to have a smaller business in France from now on.

In Ireland, volumes were down 4%, as the warm summer of 2018 was not repeated and this hurt sales of Ballygowan water. Market share has been lost due to the growth of the energy segment.

Net debt is £566 million excluding the impact of derivatives.

Final dividend is raised to 21.7p per share (from 20.3p), which will cost c. £58 million. The current annual run-rate of dividends is around £80 million, or nearly 30p per share. The yield is c. 3%.

My view

In case you hadn’t noticed, I’m not exactly thrilled by these results.

The main factor which attracted me to this company and which keeps me involved is my conviction that the brands are valuable and have permanent value.

After reading this report, I still believe this to be the case. It’s just frustrating that the financial performance is held back on a variety of fronts: weather, legislation (sugar tax & French laws), restructuring costs, and so on.

This share currently represents around 2% of my portfolio and I’m happy to leave it at that level for the time being.


British American Tobacco (BATS)

  • Share price: £30.48 (+2%)
  • Market cap: £69.9 billion

H2 trading update

Please note that I have a long position in BATS.

This is a highly reassuring update.

Tobacco firms already had a great boost last week, when the Department of Health and Human Services (US) appeared to put on hold plans to reduce nicotine in cigarettes.

I remain underwater on my late-2017 purchase of these shares, but still have the conviction that it will turn out ok.

It’s funny how these things work. Britvic, where I’ve been less than fully satisfied by the performance, has provided a 20% return in less than a year. British American Tobacco, on the other hand, where I think the financial results have been very good, has left me sitting on a loss of about 25% (after taking dividends into account).

The difference is that investors are pricing in severe regulatory threats to BATS, whereas BVIC’s regulatory threats (sugar taxes and French red tape) don’t appear nearly as dangerous to the investment case. And tobacco smoking is in permanent soft decline in many parts of the world, where low sugar/zero sugar drinks are not.

Let’s get into this update. The company expects:

  • revenue growth in upper half of our of 3-5% long term guidance range (constant FX)
  • adjusted operating profit growth in upper half of our 5-7% long term guidance range (constant FX)
  • high single figure adjusted diluted EPS growth (constant FX)

FX will be a 1.2% headwind for 2019, and around 2% for 2020. That’s fine.

Results in the US are particularly important. BATS is very happy with progress. Revenue is in line with guidance, and there is a small growth in share of total market revenue.

Vaping: Vuse has 17.5% share of total market revenue (US). Vype has 11.8% of market revenue in the UK, 19.2% in France and 27.6% in Canada.

Revenue growth from “new categories” will be at the lower end of 30%-50% revenue growth guidance, as vapour has been under scrutiny and under pressure in the US. New York City Council has just banned flavoured e-cigarettes.

In Japan, BATS has been responsible for 18.4% of nicotine volumes this year, which is up 210bps. This includes the tobacco heating product Glo.


I’ve been looking forward to seeing the BATS leverage profile reduce.

Today’s RNS confirms that adjusted net debt/EBITDA should reduce by 0.4x. In June, this is what the company promised: a reduction from 4x to 3.6x.

The company remains investment-grade according to the credit rating agencies, and it continues to target an upgrade from Moody’s in the medium term, from Baa2 to Baa1.

My view

When I got involved with this share, I knew there were risks involved.

Those risk have indeed proved to be hazardous to the shares. I seem to be in the habit of buying into companies whose activities are targeted by governments!

But I’m a sticky shareholder and am optimistic that I will recover my investment in BATS. It yields over 7%, and the share price has stopped falling over the last 12 months: we are up 10% compared to a year ago. With encouraging market share in new categories, and resilient brands in the old categories, the only thing that can derail this is extreme government intervention. While that is certainly possible, I’m happy to bet against it for 3% of my portfolio.



In other news, I see that Fidelity China had a weak six months. 24% of the entire portfolio is in Tencent and Alibaba, so it’s an easy way for UK investors to access those particular companies. It costs about 1% in ongoing charges, and has been buying back its own shares due to the NAV discount at which it trades. Could be worth a look.

I’ll leave it there for today. See you tomorrow!





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