Key Investment Highlights
 

Nichols PLC (LON: NICL) is a well-established soft drinks Company, which serves in over 85 countries. It has a diversified and profitable business model with the potential to continue the growth trend in future. Financially, both UK and International business are contributing positive performance over the years. The total revenue and EBITDA have increased by 6.1 per cent and 15.1 per cent, respectively, in the past 5 years. The ‘Out of Home’ sales increased by 8 per cent in 2019 (against 2018) and now contribute 31 per cent of the Group’s revenue.

Operationally, the market for Squash drinks is likely to surge with increasing awareness and adoption of no-added-sugar beverages. Moreover, the core brand Vimto continues to gain the market share and outperformed by markets by 5.1 percentage points in 2019. Further, the Group has cash generative business model which has shown resilience during the challenging market conditions and the management looks confident to continue the momentum of growth in 2020. From the industry perspective, the soft drinks market has historically proven to be resilient in any downturn. The Group has the potential to tap the market opportunities with its established core products, approach for innovation and acquisitions. As per the trading scenario, the share price is currently hovering near its 52-week low. Moreover, the stock is trading above its 50-day moving average, reflecting a lucrative opportunity to enter the stock.

 
Nichols PLC (LON: NICL) – Upside Potential in the Long Run with Strong Fundamentals

Nichols PLC is engaged in the soft drinks business worldwide. It deals in both carbonate and still categories. The Company offers various brands under its portfolio, including Vimto, Starslush, Feel Good (acquired the brand in July 2015), FRYST, Levi Roots (acquired the license in 2010), Sunkist (held UK license in 2006) and ICEE. The Vimto brand serves in over 85 countries, while other brands are sold in the UK market. It caters to grocery retailers, wholesalers, discount channel and licensed operators. The Company was established in 1908 in the North West of England. It is listed on FTSE AIM UK 50 index and was admitted to the London Stock Exchange on 11^th June 2004.

On 22^nd July 2020, the Group will announce its interim results.

 
(Source: Annual Report, Company Website)

Key Fundamental Statistics



Segments at a Glance

Operationally, the Group bifurcates its revenue and resources by two segments - Still and Carbonate. Geographically, the business is domiciled in the UK, while other segments are Africa, the Middle East, the Rest of the World. The UK business contributed around 80 per cent of revenue in the financial year 2019.


(Source: Annual Report, Company Website)

 
(Source: Annual Report, Company Website)

Strategic Growth Pillars
 

1. More from the core: Continuous investment and seeking growth in core markets, core products and customers.

2. Whenever, wherever: Increasing penetration within UK and Internationally to make the products available everywhere.

3. Thirst for New: Pursuing innovative approach to capture future trends and seeking accretive growth opportunities.

4. Happier Future: Targeting a sustainable green future and launched sustainability agendas in January 2020.
 

Significant Developments of 2020

1. 31^st March 2020: The Group cancelled the final dividend of the financial year 2019 due to the uncertain outlook scenario.

2. 26^th February 2020: The Group reported an increase in top-line and bottom-line performance for the financial year 2019, which resulted in 6 per cent increase in final dividend to 28.0 pence per share.
 

Top Shareholders Statistics


(Source: Refinitiv, Thomson Reuters)

COVID-19 Trading Update (as on 31^st March 2020) – Reflecting Robust Balance Sheet and Diversified Business Model
 

In the first two months of the financial year 2020, the Group’s performance was in line with management expectations. Led by the restriction of movement of people worldwide and the COVID-19 pandemic, the Board of NICL expects it will have an impact on the Group's financial performance in 2020. As per the level of global uncertainty, the Board is not able to provide financial guidance for FY2020. The Company has cancelled its 2019 final dividend of 28 pence per share to preserve cash of GBP 10.4 million over the critical spring and summer period. The Group witnessed a strong balance sheet, with no debt and more than GBP 40 million of cash.

Financial Highlights (for the year ended 31^st December 2019) – Strong Fundamental Performance Reported with no Debt on Books


(Source: Annual Report, Company Website)
 

Group’s revenue for the financial year 2019 stood at GBP 147 million, an increase of 3.5 per cent as compared to 2018. The like for like Group revenue stood at GBP 144 million (excluding the acquisition of Adrian Mecklenburgh Limited (AML)), an increase of 1.4 per cent against 2018. Led by the strong growth in the Middle East, the gross profit increased by 7.9 per cent to GBP 70 million (2018: GBP 64.9 million). Whilst gross margin improved to 47.6 per cent from 45.7 per cent in 2018.For the financial year 2019, EBITDA stood at GBP 37 million, a growth of 9.5 per cent as compared to the prior year. The operating margin was 22.1 per cent, which was more or less same as against the previous year (2018: 22.3 per cent).

Profit Before Tax for FY19 was GBP 32.4 million,an increase of 1.88 per cent against the prior year (2018: GBP 31.8 million). The operating profit cash conversion for FY19 stood at 105 per cent, an increase from the previous year of 91 per cent. On 31^st December 2019, the Company had no debt on books and all funding done via equity route.

Financial Ratios – Decent Performance with respect to Profitability, Liquidity and Leverage Ratios against the Industry Median

 

The reported gross margin of 47.6 per cent for the FY19stood higher than the previous year of 45.7 per cent. EBITDA margin increased by 1.4 per cent to 25.2 per cent in FY19 as compared with the previous year (FY18: 23.8 per cent). Return on equity for the financial year 2019 increased to 22.6 per cent against the industry median of 14.3 per cent. On the liquidity front, Nichols Plc’s quick ratio stood at 3.06x, and the current ratio was 3.38x in FY19. Both liquidity ratios surged as compared to the industry median. On leverage front, the asset-equity ratio and debt-equity ratio of Nichols Plc’s were 1.25x and 0.03x, respectively, which were lower as compared to the industry median of 2.12x and 0.44x, respectively.

Share Price Performance Analysis


Daily Chart as on 2nd June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 2nd June 2020, at the time of writing (before the market close, at 10:00 AM GMT+1), Nichols Plc shares were trading at GBX 1,289.99 and remained almost the same against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,880/GBX 858.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day and 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. Also, the 14-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: EV/Sales Approach (NTM)



To compare Nichols Plc with its peers, EV/Sales multiple has been used. The peers are Britvic Plc (NTM EV/Sales was 1.81), Stock Spirits Group Plc (NTM EV/Sales was 1.79), A.G.Barr Plc (NTM EV/Sales was 2.19), and Fevertree Drinks Plc (NTM EV/Sales was 8.74). The Average of EV/Sales (NTM) of the company’s peers was 3.63x (approx.).

Method 2: Price to Earnings Approach (NTM)



To compare Nichols Plc with its peers, Price/Earnings multiple has been used. The peers are Britvic Plc (NTM P/E was 13.30), A.G.Barr Plc (NTM P/E was 20.06), Cranswick Plc (NTM P/E was 22.03), Hilton Food Group Plc (NTM P/E was 24.29), and Fevertree Drinks Plc (NTM P/E was 46.47). The Average of P/E (NTM) of the company’s peers was 25.23x (approx.).

Valuation Metrics


(Source: London Stock Exchange)

As on 30^th April 2020, the Price to Earnings, EV/EBITDA and Price to Book multiples of the Nichols Plc were 17.6x, 11.8x and 3.8x, respectively, and the same multiples were lower as compared with the Beverage industry. It is reflecting that the company’s shares are undervalued based on the above metrics as compared to its peers.

NICL V/S FTSE AIM UK 50 Index Price Performance – 2 Years


(Source: Refinitiv, Thomson Reuters)

In the last two years, Nichols Plc share price has delivered negative 16.77 per cent return as compared to negative 20.06 per cent return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last 2 years.

NICL Total return- 5 Years


(Source: Refinitiv, Thomson Reuters)

In the last five years, Nichols Plc has delivered a total return of 15.71 per cent while the FTSE All-share index has delivered a return of 8.77 per cent.

Industry Outlook

As per Technavio’s report (published in 2018), the market size of global soft drinks is expected to grow by USD 316 billion between 2019 to 2023. The key market trends include the adoption of recycled packaging and plastic concerns, 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. In 2019, the volume in the UK soft drinks market declined by 2.4 per cent; however, the value sales rose by 0.8 per cent (compared to 2018).

Growth Prospects and Risk Assessment

Year 2019 has again been a robust year for the whole Group with both the United Kingdom and International regions contributing to the progress of the business, which gives the Company a sturdy platform to drive success in the marketplace. During 2019, the Group delivered an improvement in the financial and operational performance. The brand, Vimto also grew in line with market expectation and added £0.8m to its brand value (as per the data from Nielsen). Moreover, Vimto has the potential to outperform the market in Stills, Squash and Ready to drink categories. It has established production capability, which is supported by dual suppliers in more than one location, which ensures a continuous supply of raw material.

The Company is well-positioned with a diversified business model, a strong balance sheet and remains highly profitable with growth in earnings per share. FY19 results reflected the continued victory of the “Value over Volume” strategy. The Group has delivered further growth and continues to expand its footprint nationally in the Out of Home route to market (Out of Home sales surged by 8 per cent in 2019). In the international business, the Group is confident about the long-term prospects in the Middle East (sales grew by 20.6 per cent in 2019), while African market performed decently. During Ramadan 2019, the Group also attained the best sales performance from the Vimto brand.

Regarding the potential risks, supply could be an issue if Vimto relies on a single source for the compound. Moreover, the government programme - ‘Deposit Return Scheme’, which is to be implanted in the UK in 2023 and Scotland from 2021, can impose legislative challenges and can increase complexity for promoting single-use plastic and recycling. The soft drinks market is a highly competitive market which is heavily driven by promotions, and hence, any negative publicity can massively hit brand performance. Some additional risks to be looked at - failure to expand portfolio due to the rising health concerns; inventory shortage due to supply chain disruption presented by COVID-19 mayhem, and the risk associated with the climate change.

Business Outlook Scenario

Even as the Vimto brand can deal with the market changes, there remains a significant challenge with the overall economic uncertainty. With an ancestry of 112 years, the Company has successfully weathered substantial changes and challenges as seen earlier too. The management stays absolutely confident in Nichols' ability to emerge from such unprecedented period. It continues to deliver the Group's long-term growth plans, while leveraging the strength of the NICL's brands, strong balance sheet and diversified business model.

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 7.7 per cent, EPS diluted grew by 5.0 per cent and net profit margin accelerated at a CAGR of 2.1 per cent.

Based on the decent growth prospects, and supported by valuation undertaken using the above two methods, we have given a “Speculative Buy” recommendation at the closing market price of GBX 1,290 (as on 1^st June 2020) with lower double-digit upside potential based on 3.63x NTM EV/Sales (approx.) on FY20E sales (approx.) and 25.23x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted data and peer information have taken from Refinitiv (Thomson Reuters).
* The “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 2nd June 2020.

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