Guinness, the famous ad slogan used to say, is good for you. Its owner, spirits-focused Diageo, must agree, having brushed aside rumours that it intends to sell this hugely valuable asset.
Having a strong brand is never something to be sniffed at, and drinks manufacturers know that more than most. Fevertree has built a global business around the idea that the mixers we pour on to spirits should be the very best. Soft-drink maker AG Barr even describes itself as a builder of great brands, and with good reason. Messaging and design can help drive purchasing decisions and increase the appeal to new drinkers.
Once won, customers tend to stay loyal to their favourite tipple, mixer, tea, fruit juice or specialist milk, to the point of being unlikely to switch, increasing the chance of stable revenues. The downside of loyalty is that it makes forced reformulations, stemming from policies such as the sugar tax or ingredient price spikes, particularly trepidatious.
AG Barr’s portfolio includes UK top-five fizzy drink Irn Bru and exotic fruits beverage Rubicon. Barr has expanded over the years with acquisitions such as pre-mixed Funkin alcoholic cocktails, energy drink Boost and oat milk brand Moma.
Beverage companies need portfolios that cater to changing trends, such as declining alcohol consumption. One incentive behind Carlsberg’s 2024 acquisition of Britvic and the British producer’s licensing rights and eye-catching family of iconic brands (from Robinsons squash to London Essence mixers and J20) was that it enabled it to create a drinks powerhouse of alcoholic and non alcoholic brands.
HOLD: AG Barr (BAG)
Soft-drink maker reports progress with Irn Bru, Rubicon and Boost brands, writes Michael Fahy.
Another year of double-digit growth for the Rubicon brand helped to power sales and profits higher at soft-drink producer AG Barr.
In a trading update following the end of its financial year on 25 January, the company reported group sales up 5 per cent to £420mn. Its adjusted operating margin is also on track to widen to 13.5 per cent — a touch ahead of analysts’ forecasts and 1.2 percentage points higher than last year.
All three of its core soft drinks brands — Rubicon, Irn Bru and the Boost energy drinks business it bought two years ago — performed well, with Rubicon described as the “standout performer” and Irn Bru now one of the top five carbonated soft drinks in the UK.
Although the company incurred a £5mn one-off cost related to integrating Boost (which is currently being produced by contract packers but manufacturing is being insourced) and spent £19mn on new and upgraded plastic bottling lines, it finished the year with a £4.1mn improvement in its net cash position, to over £60mn.
The underlying improvement in earnings and forecasts therefore makes them a more attractive proposition. The shares now trade just below 14 times forecast earnings (for 2026) – a discount of about 25 per cent to their 10-year average, Malhotra said. Little wonder sell-side analysts are universally bullish.
BUY: Time Finance (TIME)
Underlying margins are on the rise, writes Mark Robinson.
In keeping with its December trading update, Time Finance has delivered adjusted half-year earnings ahead of expectations.
Demand for the group’s alternative finance products continues to increase, as high street banks remain reluctant to provide funding to SMEs. But the banks’ apparent diffidence looks to be overdone given that there are no signs that the quality of Time Finance’s loan book has deteriorated with write-offs for net bad debt stable at 1 per cent.
Net deals in arrears fell by one percentage point to 5 per cent, all the more impressive given “the increasingly challenging environment for SMEs”.
The group’s ability to meet increased new business is being augmented by improved funding facilities, including a £65mn invoice finance facility with NatWest and a £64mn finance facility with the British Business Bank. And the group is now “well on track” to meet its objectives under its four-year medium-term strategy.
Indeed, it has been able to formulate new strategic targets, including growing its lending book to over £300mn, and increasing return on equity to mid-teen percentages. The former rate stood at £209mn through to 30 November, against £189mn 12 months earlier, representing an increase of 11 per cent. Over the same period, net tangible assets rose from £36.4mn to £41.5mn.
Like any financial organisation, improvements at the operating level tend to be incremental, but the group managed to boost reported margins by a lofty four percentage points to 21 per cent.
Since August 2023 the group has delivered several profit upgrades, and there is nothing in these interim figures to suggest that momentum on the earnings front is waning. Yet the group trades at a discount to net assets on an undemanding price/earnings ratio. More to come.
HOLD: Texas Instruments (US: TXN)
The semiconductor manufacturer is exposed to the cyclical automotive and industrial markets, writes Arthur Sants.
Texas Instruments makes analogue semiconductors used in cars to regulate voltage and measure temperature. They are also used in speakers to amplify noise, wireless devices to convert radio signals, and scanners to interpret light waves. Its biggest markets are industrial and automotive.
As a result, Texas Instruments is cyclical in its performance. It is struggling with subdued demand in automotive and industrial. In the three months to December, revenue fell 2 per cent year-on-year to $4.01bn (£3.21bn), while operating profit was down 10 per cent to $1.38bn.
There was a hope that Texas Instruments would be the first among peers to recover as it was one of the first to correct. However, broker Jefferies said this “isn’t looking to be the case, with auto still correcting further and no signs of Industrial recovery yet”.
Management has taken a risk by not reducing investment. Last quarter, capex rose 4 per cent to $1.19bn and research and development spending increased 7 per cent to $491mn. This increased spending without demand recovering is increasing inventories. Jefferies says having to sell off this inventory cheaply will pressure margins, and management will have to take “their medicine” and cut capex.
In our view, overinvesting is definitely better than underinvesting. The issue for investors is that Texas Instruments trades at a forward P/E ratio of 34, which is near historic highs. If a recovery is on the way, it looks to be already be priced in.
