A souring of sentiment towards soft drinks star turn Nichols (NICL:AIM) presents an opportunity to buy into one of the AIM market’s most dependable consumer-facing companies.

Earnings estimates have come down following a December profit warning and investors are worried that delivery issues in the Middle East could continue.

In our view the sell-off is overdone given Nichols’ strong brand portfolio, rock-solid balance sheet and long-term overseas growth potential.

Newton-le-willows-headquartered Nichols is the company behind the iconic Vimto brand, popular in the UK and around the world. The product enjoys strong demand during the Ramadan religious festival.

Nichols also owns Feel Good, a range of natural soft drinks with zero added sugar, Levi Roots, Sunkist and Starslush.

Boasting brand strength, pricing power and an asset-light outsourced global production model, Nichols is highly profitable and strongly cash generative, which supports ongoing investment in organic growth initiatives and acquisitions, as well as a progressive dividend.

DOWNGRADES DISAPPOINT

Late last year (19 Dec), Nichols warned the worsening of strife in Yemen had resulted in the supply route to its Yemeni customer being blockaded, preventing it from sending any further Vimto concentrate shipments planned for December 2017.

Consequently, Nichols’ management guided towards a flat adjusted pre-tax profit haul for 2017. Disappointingly, Nichols also warned 2018’s percentage profit growth is likely to be constrained to the low single digits, since the Yemen conflict ‘coupled with some reported slowing in the Saudi economy indicates that sales to the Middle East region in the year ahead are likely to be less than previously anticipated.’

STILL FULL OF VIM

Shares believes the Yemen issue shouldn’t overshadow Nichols’ strong growth in Africa and Vimto’s ongoing outperformance of the wider UK soft drinks market, which is helping Nichols to mitigate input cost inflation.

Nichols’ diversified product portfolio means it should be able to comply with and mitigate the effect of the government’s soft drinks levy, effective from April 2018. As Nichols assures: ‘We are well prepared for the introduction of the Sugar Levy with 100% of the Vimto and Feel Good brands portfolio already below the levy threshold.’

For the year to December 2017, N+1 Singer forecasts flat adjusted pre-tax profit of £30.5m ahead of £31.1m in 2018 for earnings of 69.1p and a 35.5p dividend. For calendar 2019, the broker looks for pre-tax profit of £32.2m, earnings of 72.1p and further dividend growth to 39p. Significantly, Nichols’ net cash is forecast to build from £36.1m to £47.6m, acquisitions notwithstanding, in 2018, ahead of £60.1m in 2019. (JC)

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