Fevertree Drinks PLC (LON: FEVR)

Fevertree Drinks Plc is an FTSE AIM All-Share listed beverages company founded in 2013 and headquartered in London, United Kingdom. Its geographical areas of operations were divided into segments like the United Kingdom, Europe, the US and the Rest of the World. Fevertree is one of the major carbonated mixers for alcoholic spirits. The Company has a distribution network in around 75 countries globally. FEVR has various products ranges catered to hotels, restaurants, bars and cafes. The Company's mixers are generally used as the accompaniments for alcoholic spirits. They are also used in cocktails. Its products range comprises different variants of tonic water, lemonade, ginger ale, soda water and cola. The Company uses Fever-Tree brand to sell its offerings to restaurants and bars.

On 15 September 2021, FEVR would announce its H1 FY2021 results.

In FY2020, FEVR paid a total dividend of GBX 15.68 per share, up ~4.% YoY. The last dividend of FY2020, GBX 10.27 per share was paid on 28 May 2021 (final dividend). It had an ex-dividend date of 8 April 2021.

Growth Prospects

• Strong relationship with on-trade customers: FEVR renewed many old contracts and opened new national accounts with MGM in the US and Center Parcs in the UK. It also offered support to its customers through extensions of credit and ‘back to business’ deals.
• New marketing opportunities: The Company is heavily focused on new marketing opportunities. It launched branded pages in the US and UK on various retailers’ websites. It also offered various off-trade co-promotions in Germany and the UK.
• Launch of new products: FEVR continues to launch new products successfully, which fulfil customers’ needs and attract new customers. It launched Premium Soda range in the UK, which is fit for a broad range of mixing occasions. It also launched Sparkling Pink Grapefruit in the US. This offering is suitable for tequila and Spritz occasions.
• Team expansion: The Company is continuously expanding its team to focus on growth. It has reallocated employees to new initiatives and projects. In FY2020, 35 new employees joined the Company.
• Growth of premium spirits: Due to the Covid-19 restrictions, consumers are increasingly using premium spirits and mixers at home to treat themselves. A large percentage of consumers in the UK have more disposable income, and they want to spend on premium drinks.

Key Risks 

• Supply chain risk: There could be delays in the supply chain due to more complicated customs and excise arrangements. It could also reduce profitability both in the short and long term.
• Failure to commercialise new ingredients: New products and continuous innovation is key to satisfy evolving customer needs. Hence, any failure in this regard could lead to loss of customers to the competitors and an impact on margins.
• Increasing health-consciousness of customers: Worldwide, customers are becoming more and more health-conscious. Hence, any failure to promote healthier products could pose reputational risk and loss of customers.
• Cyber threats and data breaches: As FEVR holds customer data, it needs to have robust cybersecurity in place. Otherwise, it could lead to a loss of reputation as well as loss of customers.
• Changes in consumer spending levels: Muted disposable income and lower consumer confidence could lead to a drastic change in consumer spending levels, affecting the top-line and margins of the Company.
  

Now we will analyse some key fundamental and shareholders statistics of Fevertree Drinks PLC.

AGM Trading Update (released on 20 May 2021)

• Since the start of the year, the Off-Trade performance in the UK has been strong. In the 13 weeks ending 18 April 2021, the sales increased by 10.1% YoY, exceeding the total mixer category. It was driven by the success of the new flavours and the strength of the brand.
• In the US, FEVR achieved a strong performance in Off-Trade sales, which surged 38.2% YoY in the 12 weeks to 27th March, exceeding the wider mixer category. It was driven by increased at-home consumption and repeat purchases due to pricing optimisation.
• The On-Trade remains materially impacted across Europe, and recovery is expected to lag the US and UK.
• In Australia, the On-Trade performance has been resilient in suburban areas with a good recovery. Moreover, Fever-Tree's progress in the Off-Trade remains strong.

Financial and Operational Highlights (for the year ended 31 December 2020 as of 18 March 2021)

(Source: LSE Website) 

• Driven by very strong Off-Trade performance and offset by widespread On-Trade closures, revenue in FY2020 was down 3% YoY.
• Off-Trade sales were beyond expectations in FY2020. FEVR maintained its position as the number one brand in the UK retail mixer category.
• However, due to the decline in revenue, gross profit was down 12% YoY, and diluted EPS declined 29% YoY in FY2020.
• On a positive note, FEVR’s asset-light business model led to a strong financial position, with cash position rising 12% YoY in FY2020. Hence, the management increased the dividend by 4% YoY in FY2020.

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 13 July 2021, at 9:35 AM GMT, FEVR’s shares were trading at GBX 2,530.00, down by 0.12% against the previous day closing price. Stock 52-week High and Low were GBX 2,786.54 and GBX 1,919.00, respectively.

On a daily chart, FEVR's price is sustaining above 200-day EMA of about GBX 2,379.48, indicating the possibility of an upward movement. The 200-day SMA of about GBX 2,390.93 is also sustaining below the stock price. Hence, there could be an uptick in the stock price in the near term. The MACD line is trading above the centreline and forming a positive crossover with the signal line.

In the last three months, FEVR’s stock has delivered a decent positive return of ~11.05%. Also, it has outperformed the FTSE AIM All-Share Food, Beverage and Tobacco index with a return of around 8.17% and the FTSE AIM All-Share index with a return of about 1.11%.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

FEVR delivered a resilient performance in FY2021, with Off-Trade performance in the UK exceeding the total mixer category. In the US also, Off-Trade sales surged 38.2% YoY in the 12 weeks to 27th March. Furthermore, the Company has a strong business model characterised by a diversified channel mix, ability to cater to evolving consumer demands, strong financial position, continuous investments and innovation, which provides further confidence for FY2021. The Company could benefit from its strong relationship with on-trade customers, new marketing opportunities, the launch of new products, expansion of its team and demand growth for premium spirits going into FY2021. The management anticipates further productivity benefits as the pandemic situation improves.

The Board is confident that its continued investment in the future opportunity for the brand would drive long-term sustainable growth. On the technical chart, the next important support level is at GBX 2,119.00.

Considering the Company’s strong business model, its resilient performance in FY2021, its focus on new opportunities, its strong relationship with customers, the decent profitability, liquidity and leverage position of the business, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Fevertree Drinks Plc at the current price of GBX 2,530.00 (as on 13 July 2021 at 9:35 AM GMT), with lower-double digit upside potential based on 11.37x EV/NTM Sales (approx.) on FY21E sales (approx.).

 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*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.

*The reference data in this report has been partly sourced from REFINITIV

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