Investors seeking a high-quality, defensive recovery play should consider soft drinks group AG Barr (BAG), the company behind iconic Scottish brand IRN-BRU that has demonstrated resilience in previous downturns.

The shares have lacked fizz of late, yet we believe the sell-off is overdone. Liberum recently upgraded the stock from ‘hold’ to ‘buy’, saying swift action by management and a transformation programme that started in September 2019 provides ‘resilience and flexibility’ for current times.

Shares is a long-term admirer of AG Barr, also a firm favourite of well-respected fund manager Nick Train, as it offers the potential for compounding growth for years to come thanks to its portfolio of iconic brands.

Besides biggest brand IRN-BRU, the carbonated drink whose recipe remains under lock and key, it owns Rubicon, Strathmore and cocktail mixers Funkin. It also sells brands such as Rockstar, Snapple and San Benedetto under licence.

Understandably given the impact on the economy, AG Barr has pulled earnings guidance, with earlier return to sales momentum halted by the COVID-19 crisis.

Following the start of the lockdown and the closure of the on-trade (pubs, hotels and restaurants) across the UK, the group has seen a material impact on the consumption of soft drinks.

Sales and earnings will take a hit near-term as pubs, bars and hospitality venues are shuttered, yet sales through supermarkets are resilient. An end to lockdown offers a positive sales catalyst and long term recovery should be achievable due to the company’s strong market position and fortress balance sheet.

There is significant brand loyalty by customers to IRN-BRU and AG Barr is a very well run business.

Risk factors to consider include a longer than expected COVID-19 pandemic and associated higher unemployment levels, sticky trends towards health and wellness – which would see consumers shunning fizzy drinks, even the low and no sugar ones – not to mention aggressive innovation by rivals in the market.

At the end of January 2020, AG Barr had net cash of £10.9m. Cash is being managed tightly, the dividend has been suspended and capital expenditure lowered, while it has fully drawn down a £60m revolving credit facility.

Liberum’s analysis suggests AG Barr has enough liquidity, even in the unlikely scenario that the lockdown goes into the 2021 calendar year. The investment bank sees free cash flow recovering by the year to January 2022, suggesting dividend payments could be restored a year earlier than the January 2023 financial year it currently has pencilled in.

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