16th Sep 2022 20:15
(Alliance News) - Despite drink mixers maker Fevertree Drinks PLC reporting strong half-year top-line growth and backing revised full-year guidance on Tuesday, analyst at Berenberg said their confidence in the firm was diminishing.
Berenberg cited increasing challenges in the UK on-trade sector and a lack of visibility on cost pressures for its reduced confidence in Fevertree's near-term earnings profile.
"With these two factors at play," said Berenberg, "we think that there are limited positive catalysts in the near term, and downgrade Fevertree to Hold (from Buy)."
On Tuesday, Fevertree said revenue rose 14% to GBP160.9 million in the six months that ended June 30 from GBP141.8 million a year prior.
The revenue growth was seen across all markets, and led by a 27% rise in total European revenue, which came in at GBP52.3 million.
However, despite the strong top-line performance, pretax profit fell a sobering 30% to GBP17.6 million from GBP25.3 million.
This was as gross margin fell by 670 basis points to 37%, as a result of rising costs of logistics across the industry, as well as higher product costs - an area in which Berenberg expressed particular concern.
It said that UK on-trade is a "core part of the Fevertree story", explaining it is where the firm built its brand, where it has the best market share, and where it earns the best margins.
However, Berenberg cautioned that this channel was under increasing pressure due to rising energy bills putting significant pressures on operators and reducing discretionary spending weighing on footfall.
In addition, Berenberg suggested the emergence of novel offerings by competitors, such as fellow mixer maker London Essence's tonic dispense font, may also weigh on the company.
This was despite Fevertree's UK on-trade sales rising 73% compared to 2021; a year hit by lockdowns and restrictions, and the company now boasting a 50% value share in the on-trade mixer category.
"While we believe that the company will eventually recover margins, we struggle to gain confidence that things will not get worse before they get better, with glass, aluminium, and paper producers citing further price increases," Berenberg explained.
Chief Executive Officer Tim Warrillow acknowledged these challenges, saying the firm remains "highly mindful" of cost impacts amid an "exceptionally challenging environment".
Nonetheless, the company reiterated its revised full-year revenue guidance of GBP355 million to GBP365 million, with earnings before interest, tax, depreciation and amortisation range of around GBP37.5 million to GBP45 million. Gross margin is expected between 33% to 35%.
In 2021, it achieved GBP311.1 million in revenue, with Ebitda of GBP63.0 million, and a gross margin of 42%.
Berenberg said it saw price as a "key lever" to offset the firm's risk of declining volumes and margin pressure. It expects Fevertree to make mid-single-digit percentage price increases most of its markets in financial 2023, though it warned this may result in elasticity impacts, "given the tightening consumer outlook."
"Should pricing, cost inflation, or government stimulus surprise us to the upside, our caution may prove unjustified," it concluded.
By Heather Rydings; [email protected]
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