22nd Jul 2022 14:39
(Alliance News) - RBC on Friday said headwinds are against Fevertree Drinks PLC's top line are gathering pace, and therefore it "no longer has any confidence" the firm's margins will improve in the near-term.
Last week Friday, the premium mixers maker said that rising costs and supply chain woes were putting pressure on profit. It slashed full-year guidance as a result.
RBC lowered its recommendation for the stock to 'underperform' from 'sector perform'. It slashed its price target to 700 pence from 1,600p.
Fevertree shares were 1.1% higher at 1,072.00p each in London on Friday afternoon, however, the stock has fallen over 15% since the start of last week.
In the first half of 2022, Fevertree posted revenue of GBP160.9 million, up 14% from GBP141.8 million year-on-year.
Off-trade sales - meaning drinks bought for the home rather than in bars and restaurants - fell 21% in the UK as Fevertree lapped lockdown comparatives. US off-trade sales more than doubled compared to pre-Covid levels, reflecting the brand's significant growth in the territory over the past three years.
However, the company flagged labour shortages in the US, resulting in greater UK production and bringing greater exposure to increasing sea freight rates. In addition, the firm explained that glass availability has become "severely restricted" and industry-wide cost pressures have increased. Fevertree views these cost headwinds as "transitionary", though RBC disagrees.
Fevertree added that it expects a further 400 basis points to 600 basis points of margin dilution, anticipating a gross margin around 33% to 35%, which would be down from the 42.1% posted for 2021.
It also said that it expects earnings before interest, tax, depreciation and amortisation in a range of GBP37.5 million to GBP45 million for the full-year - down from a prior range of GBP63 million to GBP66 million. In 2021, the company achieved Ebitda of GBP63.0 million.
However, RBC said: "We take issue with Fevertree calling current cost headwinds 'transitory'. We think there is a wider problem."
RBC said that Fevertree's top line also faces pressures. It said that the company will face issues including, but not limited to, moderating consumption in US premium spirits, potential shift into more complex cocktails during fewer on-trade visits, and increasing pushback from retailers and distributors against price increases.
It added that the latter is "particularly important", since the company did not increase prices this year in the US.
RBC added that Fevertree's "track record for margin guidance has been poor". The Canadian investment bank said Fevertree's update last week was the sixth profit warning in three years and the company has missed margin guidance each year since 2017.
Based on this, RBC said that its Ebitda margin forecasts for financial year 2022 sit 13% below company guidance.
RBC also pushed out any forecast gross margin improvement to financial year 2025, saying: "We do not feel comfortable it will enjoy substantial margin improvement in the foreseeable future."
"We still believe in the long-term opportunity to premiumise the global mixer category but we fear further disruption is not priced in," RBC added.
By Sophie Rose; [email protected]
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