Overview
Nichols PLC (NICL) is a Merseyside, United Kingdom-headquartered international soft drinks company with sales in over 85 countries with a portfolio of branded still, cordial and carbonated drinks which can be found in cash and carries, discount retailers, supermarkets, restaurants, bars, clubs, pubs, and leisure outlets. In 1908, in Manchester, John Noel Nichols created the drink Vimto, and for over 100 years, the group has been producing a unique soft drink by mixing its secret recipe of fruits and spices. The group was admitted to the London Stock Exchange in June 2004 and is traded on the AIM market, where it is a constituent of the FTSE AIM UK 50 Index. Through international market presence, product categories and brands, the company seeks to grow its business by pursuing a balanced mix of volume and value growth.

The company benefits from four distinct routes to market and a major contributor to its consistent growth has been its diversification, with products sold in over 85 countries and varied brand portfolio, which includes Vimto, Levi Roots, Feel Good, Starslush, ICEE and Sunkist. Through the targeted acquisitions and by developing a portfolio of brands and distribution channels, the group seeks to grow its business organically. Vimto, which is available in cordial, carbonated and still variants with pack sizes, is an iconic brand which is popular around the world, while Nichols acquired the Feel-Good brand in July 2015, which extended its portfolio into the adult premium and health soft drink categories.

Key Statistics



Management

John Nichols has been the Non-Executive Chairman since 2007, and has held the position of Managing Director and Executive Chairman of the Group before. Marnie Millard OBE was appointed as the Chief Executive Officer in May 2013. Tim Croston is the Chief Financial Officer of the group.

Routes to Market

The brands of the group reach its customers through four key routes to market, namely UK Retail, International, Out of Home and Brand Licensing. UK Retail sells a range of pack sizes and product formats, supported by innovative advertising and marketing, which includes Vimto, Feel Good, Levi Roots and Sunkist which can be found in a variety of outlets across the country. To expand the business by investing in research, marketing, technical support and new product development, the International route ensures Vimto is produced locally in more than 29 countries by authorised licensees, and the group is opening up new markets all the time, and Vimto is now available in the USA, Europe and Australasia.The Out of Home business offers a range of great frozen drinks under the Starslush, Froozie and Slurp brands, and a wide portfolio of packaged products, including Vimto, Feel Good and Levi Roots, which delivers a wide range of soft drinks solution for customers operating within the hospitality, catering and leisure industry. Brand Licensing portfolio spans confectionery such as jellies, ice lollies and even lip balm through bon bons, lollipops and jellybeans as the company work with leading sweet manufacturers to ensure its licensed range delivers Vimto taste to complement its product offering.

Top Shareholders

 
(Source: Thomson Reuters)

Recent Development

The company on 21 October 2019 announced that Tim Croston, who intends to step down from the Board by 30 June 2020 after 15 years with the Group, will be replaced by Mr David Rattigan as Chief Financial Officer with effect from 24 February 2020 and was appointed to the Board of the company. David is currently interim CFO of McBride PLC following five years as Group Financial Controller and has significant experience both in public and private companies working in senior financial positions in the consumer sector.

Financial Highlights (H1 2019, in £m)

 
(Source: Company Filings)

As a result of the Africa performance and Out of Home (OoH) growth, sales of Carbonate products grew by 8.4% to £37.7 million, while driven by Vimto dilute in the UK and Vimto concentrate sales to the Middle East, revenue from Still products has increased by 11.6% to £33.9 million. Due to strong execution in the core market, sales to Africa grew by 12.6% to £7.6 million, and sales to the Middle East in line with expectations at £4.6 million (H1 2018: £2.1 million), leading to revenues from International totalling to £14.5 million in the period (H1 2018: £11.2 million). As sales of Vimto grew by 4.0%, against a very strong prior year comparatives (H1 2018: +9.0%), revenue in the UK increased by 6.2% to £57.1 million (H1 2018: £53.8 million), while total Group revenue in the period increased by 10.2% to £71.6 million against the prior year (H1 2018: £65.0 million). During the period, the company invested in its infrastructure to support the trading growth, as Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) increased by 9.7% to £15.3 million (H1 2018: £14.0 million), while operating profit improved marginally by 2.1% to £13.3 million against £13.1 million in the prior year. Profit Before Tax at the half year was £13.3 million, up by 2.0% from the prior period, while the profit before tax margin was lower at 18.6% against 20.1% reported in the previous year. Profit for the financial period rose to £10.9 million versus £10.63 million reported in the previous year, which translated in basic earnings per share of 29.63 pence against 28.81 pence reported in the prior year. The company recommended an interim dividend of 12.4 pence per share (H1 2018: 11.3 pence), an increase of 9.7% and reflected the ongoing confidence of the management in the financial position of the group. Cash and cash equivalents available with the company declined from £37.14 million as on 30 June 2018 to £29.5 million as on 30 June 2019. Net cash generated from operating activities also decreased to £8.9 million from £13.5 million reported in the previous year.


Segmental Analysis (FY 2018, in £m)

 
(Source: Company Filings)

In the financial year 2018, revenue from Still drinks rose marginally to £64.68 million against £64.13 million, while gross profit was reported at £35.4 million from £35.16 million in FY 2017. Revenue from Carbonate, however, reported strong growth in revenue from £68.65 million in the prior year to £77.34 million, while gross profit rose to £29.5 million against £25.5 million in FY 2017.

 
(Source: Company Filings)

As the revenue from the Middle East declined considerably to £9.59 million in the financial year 2018 from £13.03 million in the prior year, revenue from total exports fell to £27.4 million from £31.1 million in FY 2017. The total share of revenue from the Middle East decreased to 6.8% and corresponding share from exports declined to 19.3%. Revenue from the United Kingdom rose to £114 million from £101 million, while the share of the revenue from the UK rose to 80.7% from 76.6% in the prior year.

Financial Ratios

 
(Source: Thomson Reuters)

Over the years, the profitability margins of the group have remained mostly constant and are near the industry median. Moreover, margins are weighted towards the second half and better performance is expected in the forthcoming half year period. During the period, the liquidity position was considerably better than the industry median. The group reported no debt, which provides it with a very important cushion and reduced non-operating expenses. The asset turnover ratio of the group is more than the industry median, suggesting optimal utilisation of resources.

Valuation Methodology
Method 1:EV/EBITDAMultiple Approach (NTM)
 


To compare NICL with its peers, EV/EBITDA multiple has been used. The peers are Cranswick PLC(NTM EV/EBITDA was 11.88), A.G.Barr PLC (NTM EV/EBITDA was 12.81), Keurig Dr Pepper Inc(NTM EV/EBITDA was 14.84),Monster Beverage Corp(NTM EV/EBITDA was 18.42),and Fevertree Drinks PLC(NTM EV/EBITDA was 23.64) The mean of EV/EBITDA (NTM) of the company’s peers was 16.32x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare NICL with its peers, Price/Earnings multiple has been used. The peers are Cranswick PLC(NTM Price/Earnings was 11.88), A.G.Barr PLC(NTM Price/Earnings was 12.81),Keurig Dr Pepper Inc(NTM Price/Earnings was 14.84), Monster Beverage Corp(NTM Price/Earnings was 18.42), and Fevertree Drinks PLC(NTM Price/Earnings was 23.64). The mean of Price/Earnings (NTM) of the company’s peers was 24.32x (approx.).

Share Price Commentary

 
Daily Chart as at 29-October-19, before the market closed (Source: Thomson Reuters)

On 29 October 2019, at the time of writing (before the market closed, at 9:48 am GMT), NICL shares were trading at GBX 1,588 and remained flat against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,880.00/GBX 1,250.00. The company's stock beta was 0.38,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £585.78 million, with a dividend yield of 2.47 per cent.

Growth Prospects and Risks Assessment

The company is well-positioned with a diversified business model, a strong balance sheet and remains highly profitable, and the management intends to increase the dividend in line with growth in earnings per share. With distribution wins across a range of national account customers, the group has delivered further growth and continues to continue to expand its footprint nationally in the Out of Home route to market. In the international business, the group is confident that the long-term prospects in the Middle East and Africa remain strong, and its partnership with ICEE has opened new channels as the carbonated frozen ranges appeal to new consumers within the leisure channel.

Changes in the market environment mainly in the UK region might impact the business operations in the near term. Even as the Vimto brand can deal with the market changes, there remains a significant challenge with the overall economic uncertainty. The UK trading conditions are expected to remain challenging, but the group is taking all possible actions to reduce the risk, and it continues to monitor the ongoing Brexit process.

Conclusion

The group has shown impressive growth in the last four years, which indicates the financial resilience and strong business model of the group. Over the last four years, revenue rose at a CAGR of 7%, while operating profit grew by 5.64%. While net income before tax grew at a CAGR of 5.13%, net income after tax increased by 5.79%.

Based on the decent prospects and supported by valuation done using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the current price of GBX 1,555 (as on 29 October 2019, before the market closed) with lower double-digit upside potential based on 16.32x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.) and 24.32x NTM Price/Earnings (approx.) on FY19E Earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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