Irn-Bru maker A.G. Barr is worth its premium price
Do not be put off by a premium equity rating at A.G. Barr (BAG), since the Glasgow-headquartered soft drinks firm has a proven recipe for success.
We believe the Irn-Bru maker can continue to compound earnings and generate sparkling returns on a long-term view and given a largely UK sales profile, Brexit appears less of an issue for the FTSE 250-listed company than for internationally-focused beverages firms.
WHAT DOES IT DO?
A.G. Barr is a soft drinks manufacturer whose competitive advantage lies in a portfolio of differentiated, highly prized brands spearheaded by iconic Scottish fizzy drink Irn-Bru, launched in 1901 and made to a secret recipe.
More recent additions include Rubicon, Strathmore and cocktail mixers name Funkin. The business also benefits from best- in-class manufacturing assets.
Resilient results for the year to 26 January showed adjusted
pre-tax profit up 2.5% to £45.2m on sales 5.6% higher at £279m.
The numbers were impressive given a backcloth of market disruption encompassing the implementation of the sugar tax.
Successful reformulation means 99% of A.G. Barr’s soft drinks portfolio is now exempt. Extreme weather and the costs associated with an industry-wide CO2 shortage were also headwinds.
Growth was particularly strong in the core carbonate portfolio, driven by Irn-Bru’s market share gains, notably in England where distribution wins by zero calorie Irn-Bru Xtra were a key growth driver.
This shows A.G. Barr is successfully moving with changing consumer tastes as sugar free variants now account for 40% of the total Irn-Bru brand.
Debt-free and highly cash generative, A.G. Barr continues to invest in its asset base while repurchasing shares and funding a progressive shareholder reward. Its proud history of dividend increases continued with a 7% total dividend hike to 16.6p for the past financial year.
Despite consumer uncertainty and the risk of further regulation, management is confident of making further progress this year with a return to its long-term strategy of prioritising value over volume set to help margins stabilise.
For the year to January 2020, Investec forecasts pre-tax profit growth to £46.6m, ahead of £48.3m in 2021. Based on the broker’s current year earnings per share estimate of 33.2p, with dividend progression to 17p shaded in, A.G. Barr swaps hands for almost 25 times prospective earnings.
Long-term investors should view this as a price worth paying for a dependable, defensive and growing portfolio compounder.