Business Overview
Fevertree Drinks Plc (LON: FEVR) is a London- Headquartered based beverages company. Its geographical areas of operations were divided into segments like the United Kingdom, Europe, United States of America and Rest of the World. As on November-07-2014, its shares got listed on the Alternative Investment Market of the London Stock Exchange for trading. Fevertree is one of the major carbonated mixers for alcoholic spirits. The Group has a distribution network in around 70 countries globally. The company was founded by Charles Rolls and Tim Warrillow in 2005. The Group has various products ranges catered to hotels, restaurants, bars and cafes. The Group's mixers are generally used as the accompaniments for alcoholic spirits. These are also used in cocktails. Its products range comprises of different variants of tonic water, lemonade, ginger ale, soda water and cola.

On 24^th March 2020, the company will announce the 2019 full-year results.

Management

Bill Ronald is the Chairman of the Group (since June 2013). He was a sales and marketing professional, having 23 years of experience at Mars. He was also the Managing Director of the UK confectionery operation at Mars. Tim Warrillow is the Co-founder and CEO of the company. He is a business management graduate from Newcastle University. Andy Branchflower is the finance Director of the Group.  He has a degree from Cambridge University. He has worked for a boutique firm specialising in start-ups and fast-growing businesses.

Key Statistics



Top Shareholders

 

Market Trend


(Source: Interim Report, Company Website)

In the last few years, the market trend is shifting from Beer to Spirits. In 2015, Beer constitutes of more than 50 per cent of US share of adult beverages and in 2018, it has come down to 45.5 per cent while the spirits share has increased from 32 per cent in 2015 to 37.3 per cent in 2018.

Growth of Fevertree in different geographies


 
 

 
(Source: Interim Report, Company Website)

In the above geographies, Fevertree has gradually increased its market share and moved ahead of its competitors. 

Company Strategy

Capitalising on Market Trends

The Group expects to continue benefit from the global spirit category premiumisation and the move towards simple long drink mixability.

Strengthening Distribution in Existing Markets

The Group focuses on increasing penetration in all of its markets and increasing the number of customers in both the On-Trade and Off-Trade.

Expanding distribution into new markets

Whilst the Group expects growth to continue to be driven mainly within its existing markets, it intends to generate growth in the medium to long term by entering new markets and is actively assessing new distribution opportunities and intends to drive growth from further involvement in co-branded promotional activities with leading spirits brands across the wider spirits category.

KEY STRENGTHS
 

(a) A strong distinctive brand

(b) Clearly differentiated products with premium provenance

(c) First mover advantage

(d) Scalable business model

(e) Strong and diverse customer relationships

(f) Experienced founder-led management team

(g) Strong cash flow generation and adjusted EBITDA margins
 

Route to Market
 

(Source: Interim Report, Company Website)

The above chart gives a brief idea about company’s route to market.

Industry Overview
 

 

Source: Statista Global Consumer Survey – October 2019

Users by age

According to a research report, the number of users of foods and beverages industry is likely to grow from 1,199 million in 2017 to 2,385 million in 2024, which represent a huge opportunity for food and beverage industry. The major consumers of food and beverages are in the age group of 25-34 years representing 34 per cent while the people in the age group of 55-64 years are less likely to consume food and beverages and these constitutes only 6 per cent.
Recently in a study 5 trends are highlighted which would be transforming the beverage industry:

Focus on health and wellness

Consumers have become more health conscious; they are shifting to healthier alternatives to traditional soft drinks. Healthy drinks like plant-based waters are also gaining popularity. The lower calorie, sugar and alcohol content drinks has also been popular with consumers.

Premiumization

With the development of various brands from various regions around the world, consumers are eagerly becoming coffee connoisseurs.

Convenience

Canned wine and cocktails have all become mainstream. They give consumers the ease of drinking their favourite products at the location of their choice.

Direct to consumer offerings

Convenience to customer has increased, companies are delivering alcohol in sixty minutes or less. These businesses are disrupting the traditional retail model.

Sustainability

Environmental concerns around excess packaging and single-use plastic are influencing consumers’ decision making. Beverage companies are responding to these concerns and becoming more eco-friendly.

It’s an exciting time in the beverage industry. We’re seeing the rapid adoption of new twists on traditional drinks as well as the greater popularity of new concepts. Also, large beverage companies align their portfolios to reflect changing consumer preferences

Recent News

On 10^th February 2020, the company announced that on 7 February 2020, Bill Ronald, the Non-Executive Chairman of the Company, bought 7,229 ordinary shares in the Company at a price of £13.90 per ordinary share via the London Stock Exchange.

Trading Update - FY2019 (31^st December 2019, GBP, million)


(Source: Interim Reports, Company Website)

The company announced its trading statement for the year ended December 31, 2019. For the financial year 2019, the company’s revenue is expected to be £260.5 million, an increase of 10% from the previous year (2018: £237.4 million). During 2019, the revenue reflects the substantial progress made across many of the regions. In the United Kingdom, the revenue is expected to be £132.6 million, representing a decrease of 1%, reflecting subdued Christmas trading in the United Kingdom. The broader retail environment suffered a challenging Christmas period in the United Kingdom, with the mixer category not immune from the corresponding slowdown in spending and weak consumer confidence. In 2019, the company delivered encouraging performance in the United States. Over the last 18 months, the company has established a very robust platform in the US, which reflects an increase in the confidence. In the Europe region, the company was slightly behind the anticipations at the end of the year 2019, but sales were accelerated in the second half of 2019, with good performance across the main territories. The revenue from the rest of the world is expected to be £15.8 million, representing a growth of 32%. The group aims to invest persistently in the growing regions with decent potential. As a result, margins have ended the year 2019 behind the anticipations, and the company anticipate earnings to decrease by 5% as compared with the last year. The company's balance sheet stays robust with the year-end 2019 cash position expected to be £128 million.

Financial Highlights – H1 Financial Year 2019 (30 June 2019, £, million)


(Source: Interim Reports, Company Website)

Led by decent growth reported by the group across all of their four operating segment and remarkably in the United States where group has secured substantial distribution gain and operational progress, the  group's revenue during the period surged by 13% on a reported basis and 12% on a constant currency basis to £117.3 mn against the £104.2 mn recorded in the year-ago period. In the past six months, the group has passed through the UK sugar tax, which had a dilutive effect on its gross margin against the gross margin recorded in the H1FY18. However, this was already discounted by the group and remained strong at 51.9%. Adjusted EBITDA surged by 800bps on a reported basis and 700bps on a constant currency basis and stood at £36.7 mn. However, adjusted EBITDA margin declined slightly to 31.3 per cent in H1 FY19. This led to a 7% increase (reported basis) in the diluted EPS, and H1FY19 diluted EPS stood at 24.3 pence. The board of the group declared an interim dividend of 5.20p and recorded a growth of 23.22% on a YoY basis.

Geographical Segmentation  - Performance & Growth (H1 FY2019)
 

 
(Source: Interim Report, Company Website)

In the first half of the fiscal year 2019, the Group revenue in UK grew by 5 per cent to GBP 60.7 million. In US, the Group revenue increased by 31 per cent to GBP 19.8 million in the first half of the fiscal year 2019. During the period, in continental Europe, the company’s revenue increased by 13 per cent to GBP 29 million while in rest of world, revenue of the Group increased by 49 per cent to GBP 7.8 million.

Key Performing Indicators

Total Revenue


(Source: Thomson Reuters)

The revenue of the company grew to GBP 237.4 million in FY2018 from GBP 34.7 million in FY2014, reflecting a growth of 61.72 per cent on a CAGR basis.

Gross profit


(Source: Thomson Reuters)

The gross profit of the company grew to GBP 123 million in FY2018 from GBP 17.7 million in FY2014, giving growth of 62.36 per cent on a CAGR basis.

Operating Income


(Source: Thomson Reuters)

The operating income of the company grew to GBP 75.4 million in FY2018 from the operating profit of GBP 8.1 million in FY2014, which shows decent growth reported by the Group.

Financial Ratios

 

The reported EBITDA margin in H1 FY19 was 30.60 per cent against the industry median of 22.50%. The reported operating margin was 29.6 per cent for the H1 FY19 period. Net margin reported was 24.1 per cent for the first half of 2019, higher from the industry median of 10.7%. Return on equity for the current first half stood at 14.80 per cent. On the liquidity front, Fevertree Drinks Plc’s current ratio stood at 5.17x. On leverage front, the debt-equity ratio of the Fevertree Drinks Plc’s was 0.01x which was significantly lower as compared to the industry median of 0.53x, reflecting that the company is less leveraged as compared to its peers.
 
Share Price Performance


Daily Chart as on 25^thFebruary 2020, before the market closed (Source: Thomson Reuters)

On February 25, 2020, at the time of writing (before the market close, at 8:40 AM GMT), Fevertree Drinks Plc shares were trading at GBX 1,420, down by 0.97 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 3,290/GBX 1,341. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.926. The outstanding market capitalisation was around £1.69 billion, with a dividend yield of 1.06 per cent.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare Fevertree Drinks Plc with its peers, EV/EBITDA multiple has been used. The peers are Lanson BCC SA (NTM EV/EBITDA was 31.51), Diageo Plc (NTM EV/EBITDA was 17.39), Vranken SA (NTM EV/EBITDA was 26.37), Remy SA (NTM EV/EBITDA was 16.44) and Davide SpA (NTM EV/EBITDA was 18.34). The Average of EV/EBITDA (NTM) of the company’s peers was 22.01x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare Fevertree Drinks Plc with its peers, P/E multiple has been used. The peers are Lanson BCC SA (NTM P/E was 18.18), Diageo Plc (NTM P/E was 21.34), Vranken SA (NTM P/E was 21.64), Remy SA (NTM P/E was 27.14), Davide SpA (NTM P/E was 30.05) and Park & Bellheimer AG (NTM P/E was 63.14). The Average of P/E (NTM) of the company’s peers was 30.25x (approx.)

Valuation Metrics
 

(Source: LSE)

As on 31^st January 2020, the Net Debt to Equity ratio of the Fevertree Drinks Plc’s was around 0 which was slightly lower as compared with the Beverages industry which shows that the company is less leveraged than the respective industry. The company’s ROE multiple is 39.4x while its competitors have lower ROE multiple which shows that the company has given more returns to its investors.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE. In 2020, the ROE is increasing as compared to its peers.

Fevertree V/S FTSE AIM Share Price – 5 Years


(Source: Thomson Reuters)

In the last five years, Fevertree Drinks Plc share price has delivered 595.63 per cent return as compared to 32.50 per cent return of FTSE-AIM index, which shows that the stock has outperformed the index during the last 5 years.

Dividend Yield


(Source: Thomson Reuters)

Fevertree Drinks Plc has a dividend yield of 1.08 per cent which is slightly lower than the industry dividend yield of 4.1 per cent and sector dividend yield of 2.12 per cent.

Fevertree V/S Industry V/S Sector – 5 years


(Source: Thomson Reuters)

In the last five years, Fevertree Drinks Plc share price surged by 595.63 per cent which is significantly higher than the industry growth rate of 63.14 per cent and sector growth rate of 12.14 per cent.

Fevertree Total Return - 5 years


(Source: Thomson Reuters)

In the last five years, Fevertree has delivered a total return of 610.98 per cent while the FTSE All share index has delivered a total return of 29.94 per cent.

Competitive Benchmarking 
 
 

Currency Chart (GBP VS USD)


The current currency exchange rates for GBP to USD is 1.2966. (Source: Thomson Reuters)

Risk Factors

The company operates in a competitive industry, excessive competition could affect the margins of the Group. Macroeconomic and political uncertainty could affect the revenue of the company. Fluctuations in foreign exchange rates could impact the revenue and profitability of Fevertree.

Conclusion

For 2020, the company will be expecting a gross and EBITDA margins of 49% and 28% respectively.  The critical growth markets reflected a decent performance with sales leapt up in the second half of 2019 in Europe, US as well as in Canada and in Australia. In the first half of 2020, the business conditions are expected to remain challenging in the UK. The return on equity (ROE) recorded by the group in the past several years was considerably above its peer’s average. Also, the group has decent fundamental metrics as it has maintained an EBITDA margin above 25% since last many years and even net margin of the company reported in the past couple of years was substantially above the industry median.

Based on the decent prospects and supported by valuation undertaken using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 1,392.50 (as on 25th February 2020 before the market close at 9:50 AM GMT) with lower double-digit upside potential based on 22.01x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 30.25x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.). 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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