Nichols PLC (LON: NICL) – Having a strong portfolio of brands to deliver against long-term strategic objectives in 2021

Established in 1908, 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 is currently listed on the FTSE AIM UK 50 index and was admitted to the London Stock Exchange on 11 June 2004.

The ex-dividend date for the FY20 final dividend was 25 March 2021. On 28 April 2021, Nichols is expected to release the AGM (annual general meeting) trading update.

 (Source: Annual Report 2020)

Growth Prospects and Risk Assessment

Nichols is a well-established soft drinks manufacturer, which serves in over 85 countries. It has a diversified and profitable business model with the potential to continue the growth trend in future. The Company is well-placed for sustainable shareholder growth, underpinned by the diversified business model, outperformance of the Vimto brand against the industry, and robust liquidity profile. As per Nielsen’s report for the year to 26 December 2020, the overall UK soft drinks market grew by 2.5% against the previous year in terms of sales value. Adjacently, the Vimto Brand demonstrated a 6.7% value growth and gained considerable market share. In a nutshell, the industry prospects are favourable, and the Company has a strong portfolio of brands to tap the underlying market opportunities and gain further market share.

(Source: LSE, chart created by Kalkine Group, as of 26 February 2021)

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.

Now will analyse some key fundamental and shareholders statistics of Nichols PLC. 

Financial and Operational Highlights (for the year ended 31 December 2020, as on 3 March 2021)

(Source: Company Website)

• Nichols’ Vimto Brand performed resiliently in the Middle East despite the Covid-19 restrictions and Sweetened Beverage Tax. In Africa, Vimto Brand registered a revenue growth of 7.4% against FY19.
• However, the Out of Home (OoH) division reported a 61.4% decline in revenue in FY20 against FY19 since the performance was significantly impacted by the Covid-19 pandemic related restrictions and fixed costs weighed massively over the Group performance.
• Nevertheless, cash performance remained robust with cash conversion of 186% in FY20 and free cash flow of £17.6 million.
• As of 31 December 2020, cash and cash equivalents stood at £47.3 million, while it was £40.9 million at the end of FY19. It reflected prudent cash management throughout the year.
• Nichols proposed a final dividend of 8.8 pence, taking the full-year dividend to 36.8 pence in FY20, reflecting a 196.8% growth against FY19.
• The outlook for FY21 remained gloomy considering the near-term uncertainties, and thus, the guidance remained withdrawn.

Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 6 April 2021, at 8:10 AM GMT, Nichols PLC’s shares were trading at GBX 1,347.00, up by 1.09% against the previous day closing price. Stock 52-week High and Low were GBX 1,450.00 and GBX 964.00, respectively.

From a technical standpoint, 20-day SMA (1,264.00) and 50-day EMA (1,245.00) are indicating an upward trend in the stock and supporting the upside potential.

In the last ten years, Nichols PLC’s stock price has delivered a return of ~176.02% return as compared to ~147.86% return of the FTSE AIM UK 50 index and ~84.64% return of the FTSE All-Share Beverages index, which shows that the stock has outperformed the benchmark index and the benchmark sector.

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

Business Outlook Scenario

Inevitably, the Covid-19 pandemic presented an unprecedent challenges in FY20. Notwithstanding, the Company’s diversified business model and the strength of the Vimto’s brand maintained the resilient performance and robust balance sheet position. The Group also reported a significant outperformance in Africa and the UK region for the Vimto brand.

Looking ahead of the pandemic, Nichols reported a 6.2% revenue growth in Q1 FY21 against Q1 FY20. The Board has also proposed a final dividend of 8.8 pence, which is scheduled for payment on 6 May 2021 post shareholder approval. However, the guidance remained withdrawn considering the near-term uncertainties on the soft drinks market. Notwithstanding, the Company is well-positioned to deliver its long-term strategic ambitions, underpinned by the diversified business model and strength of the Vimto Brand. The considerable growth in full-year dividend demonstrated the Board’s confidence in the business capabilities.

Considering the robust cash generation, the strength of Vimal brand, resilient financial performance, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Nichols PLC at the current market price of GBX 1,347.00 (as on 6 April 2021 at 8:10 AM GMT) with lower double-digit upside potential based on 37.09x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

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

*Dividend Yield may vary as per the stock price movement.

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