AG Barr gets a boost from new and old brands alike

Scotland’s AG Barr may be best known for its iconic Irn-Bru drink, but the FTSE 250 firm continues to develop its product range and its first-half results show the benefits, as sales of mixers, juices, energy drinks and oat milk are all contributing to higher sales and profits.

Management is sanctioning a hike in the dividend, too, as AG Barr took market share, offset some (but not all) of the input cost inflation it faced with price increases and tapped into fast-growing energy drinks and milk alternative markets through the purchase of Boost and MOMA, respectively.

The acquisitions meant that first-half sales grew 33% year-on-year on a stated basis, but like-for-like growth was still impressive at 10.4%. Soft drink sales rose by 11.3% like-for-like, within a market that grew in value by 8.8% even as volumes fell by more than 4%. The Funkin ready-to-drink alcoholic cocktail business grew more slowly, by 2.6%, while the other operations grew by nearly 24%, as oat milk’s popularity continued to grow.

This strong first half enables AG Barr to stick to the modest increase to full-year guidance provided by outgoing chief executive Roger White and the board alongside August’s trading update.

For the year to January 2024 overall, analysts are looking for a 3% increase in operating profit to £46.7 million on the back of a 27% increase in total sales to £403 million. That equates to a drop in the operating margin to 11.6% from 14.3%. This partly reflects the lower-margin contribution from Boost, investment in new products and AG Barr’s decision to take a margin hit on input cost inflation, rather than increase prices too much and risk alienating loyal customers.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

If those consensus forecasts are correct then AG Barr will grow its profits for the third straight year in the 12 months to January 2024 as it picks up the pieces in the wake of the damage done by lockdowns and the pandemic. The trade-off may well be that the company sacrifices some operating margin to achieve this, but shareholders could still be pleased if the outcome is a resumption of sustained growth, especially after the challenges that have faced the firm over the past decade or so.

These have included regulation on sugar content, covid and lockdowns, carbon dioxide shortages and now input cost inflation. The uncertainty caused by Scotland’s proposed deposit return scheme continues to linger, even if it is currently in abeyance.

The firm is also having to adapt to changes in consumer tastes and trends. Since the end of lockdowns, mixers, juices and lemonade have declined in volume and value, to reflect the normalisation of home consumption, while on trade volumes in bars and restaurants and hospitality venues has recovered steadily and sports and energy drinks have shown robust growth.

Group operating profit has not advanced since 2018, and this may be one reason the shares are broadly unchanged over the past decade, although the acquisitions of Boost and MOMA, coupled with additional investment in brands and new products, were designed to build a launchpad for future growth.

Source: Refinitiv data

However, AG Barr does generate cash and it also has a net cash pile of £45.7 million, a pension surplus, no debt and only modest lease liabilities. This combination helps to fund the company’s dividend and a 6% increase in the interim payment to 2.65p a share tops up the pot for income seekers.

Over the past decade, AG Barr has paid out just shy of 111p a share in dividends – a substantial sum relative to the current 485p share price – and analysts expect further increases in the full-year payments for fiscal 2024, 2025 and beyond.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Fiscal year to January

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