Britvic PLC (LON: BVIC) – Demonstrating Operational Agility to Navigate Tough Headwinds.

Britvic PLC is a United Kingdom-based manufacturer of soft drinks. Apart from Great Britain, the Company operates in Ireland, Brazil and France. It has a strong portfolio of brands, including Ballygowan, Teisseire, Tango, J2O, Robinsons, Fruité, Maguary, among others. The Group also has an exclusive agreement with PepsiCo and sell its various soft drinks brands. It exports its products in more than 50 countries. The Company has witnessed organic growth with substantial international expansion over the years. It launched its Initial Public Offer in 2005, and since then, it has made several acquisitions in Ireland, Brazil, and France. The Company was admitted to the London Stock Exchange on 14 December 2005 and presently, a constituent of FTSE 250 index.

On 9 February 2021, the Company expects to provide its trading update.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

The Group has a portfolio of good brands, which would enhance the growth trajectory of the Company, and has the potential to deliver value to its investors. Some key strengths that can potentially drive growth in the future:

• it operates in a growing and resilient category and understands customer needs.
• its portfolio weighted towards low and no sugar carbonates.
• holds a portfolio of market-leading brands.
• growing international presence.
• robust market position, and long-term track record of growing investor value.

In Great Britain and Ireland, the Group has a portfolio of leading owned brands, while the agreement with PepsiCo makes them a renowned bottler. Its brands are available in over 50 countries now, while they generate 39 per cent of revenue from outside Great Britain. In FY20, the Company has delivered double-digit revenue growth and market share gain in Brazil driven by both core brands and innovation. It also made considerable progress executing the strategy, and it is well-positioned to drive future growth and returns.

Dividend Policy

Since the Company floated in 2005, it has consistently returned capital to shareholders through progressive dividend policy. Following the prudent position taken at interims to defer the decision on the dividend until later in the year, the Board has recommended a final dividend of 21.6 pence per share, with a total value of £57.7 million, which is maintaining 50% pay-out policy. The final dividend for 2020 will be paid on 3 February 2021 to shareholders on record as at 18 December 2020. The ex-dividend date is 17 December 2020.

However, due to Covid-19 situation, the consumer environment is weak, and it will impact the profitability in FY20. Moreover, the risk of water unavailability can lead to an increased cost of doing business. Also, the inability to adopt the changing consumer health trends and health policies can lead to a loss of consumer base. The increasing cyber-attacks with Covid-19 migration can arise lead to operational disruption and financial loss. Furthermore, volatility in foreign exchange rates amid recessionary economic condition can increase the cost base.

Industry Outlook Dynamics

As per Technavio’s report (published in 2018), the market size of global soft drinks is expected to grow by US$316 billion between 2019 to 2023. The key market trends include the adoption of plastic packaging, demand for sugar-free & healthier drinks, premium ingredients for better quality, and availability of products online. Coca-Cola holds the largest market share in the industry, followed by PepsiCo. In 2020, the industry can face continuous volatility in sales due to a change in consumption patterns, while cost can be impacted in the short run due to supply chain disruption.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Britvic Plc.

Recent Developments

On 20 October 2020: The Company announced that it had reached an agreement with PepsiCo, which is for a new and exclusive 20-year franchise bottling agreement for the distribution, production, sales and marketing of the carbonated soft drink brands in Great Britain. It also announced its intent for all plastic bottles in Great Britain to be made from 100% recycled plastic by the end of 2022.

On 1 October 2020: BVIC confirmed that it had completed the sale of the juice assets in France to Refresco, which includes the three juice manufacturing sites.

A Glimpse of Business Segments

(Source: Company Website, chart created by Kalkine Group)

Financial and Operational Highlights (for the year ended 30 September 2020 (FY20), as on 26 November 2020)

(Source: Company Website)

• The Company saw positive trading momentum in H1 FY20 with an increase in revenue, adjusted EBIT and margin. However, the impact of trading restrictions and social distancing measures in each of the markets adversely impacted the financial performance in H2 FY20.
• Full-year revenue was down by 6.8% year-on-year (YoY), on a constant currency basis (reported down 8.6%), while adjusted earnings per share decreased by 27.8% YoY, on an actual basis. The decline in adjusted EPS was driven by a higher effective tax rate.
• Profit after tax surged by 16.9% YoY and free cash flow stood at £90.0 million.
• The Board has confirmed a final dividend per share of 21.6 pence and the final dividend for 2020 will be paid on 3 February 2021.
• The Company has reduced its net debt balance by £45.8 million, with adjusted net debt to EBITDA ratio of 2.4 times.
• It also allows BVIC to broaden the portfolio further by taking on the Rockstar energy brand, with Purdey’s to the mainstream energy segment.
• Britvic witnessed a strong balance sheet and good liquidity position.
• In Brazil, the Company has shown double-digit revenue growth and market share gain, due to both core brands and innovation.
• In the GB At-Home channel, the Company gained market share, with value growth of 11.3% as compared to market growth of 1.5%, driven by the core brands of Robinsons, Pepsi, Tango and 7UP.
• It has extended its relationship with PepsiCo in GB to 2040.
• Britvic has a strong financing platform, with £400 million of undrawn bank facility (which matures in 2025).

Share Price Performance Analysis

On 14 December 2020, at the time of writing (before the market close, at 8:00 AM GMT), Britvic Plc shares were trading at GBX 807.00, up by 1.06% against the previous day closing price. Stock 52-week High was GBX 959.00 and Low of GBX 536.00, respectively.

From the technical standpoint, 14-day RSI (48.97), 50-day SMA (794.90), and 100-day EMA (804.70) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the past six months, BVIC’s share price has delivered ~2.53% return as compared to the ~16.32% return of FTSE 250 index, and a ~26.17% return of FTSE All Share Food & Beverage index, which shows that the stock has underperformed the benchmark index and the sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

Britvic has entered FY21 with some form of restrictions on either trading and/or the movement of people in all the markets, which will undoubtedly continue to affect performance in H1 FY21. However, BVIC entered the Covid-19 crisis period with decent growth momentum. The Company has a solid balance sheet and benefitting from the recent re-financing of RCF (Revolving Credit Facilities) to navigate the pandemic. It is maintaining high service levels to customers to ensure brand availability remains consistent and adapting the commercial plans to respond to channel shifts. Moreover, the Company has gained a reputation for being an agile, strong business that consistently creates value for all its investors. Operationally, the Group is likely to improve margins for its business in France post disposal of Refresco division. Moreover, the completion of GB (Great Britain) Business Capability Programme has transformed the supply chain infrastructure, which shall yield significant cost savings in FY21.

From the industry perspective, the soft drinks market has historically proven to be resilient in any downturn. The long-term investment case remains intact for Britvic as it is operating with a strong financial position, while proactively managing cash flow and profitability.

 (Source: Presentation, Company Website) 

Considering the consistent track record of agility and resilience, robust liquidity position and solid balance sheet, new 20-year agreement with PepsiCo in Great Britain, excellent progress made on the strategic ambitions, expanding business in Brazil, completed asset sale in France, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Britvic Plc at the current price of GBX 807.00 (as on 14 December 2020, before the market close at 8:00 AM GMT), with lower-double digit upside potential based on 18.91x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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