- Sales grow and margins expand more than expected
- Scottish firm’s balance sheet remains rock solid
- Shares at near five-year highs but remain one third below their all-time peak
“The last decade has thrown a lot at AG Barr, in the form of new regulations on sugar content, Covid-19, carbon dioxide shortages and input cost inflation (and they are all before the usual issues of competition and changing trends in consumers’ tastes), but the Scottish firm’s latest trading update suggests it is coping admirably,” says AJ Bell investment director Russ Mould.
“Sales are up, profit margins are expanding faster than analysts had expected and cash flow remains strong, even as AG Barr continues to invest in capacity and its supply chains. The company now looks poised to make record profits in the year to January 2025 and follow up with a further advance in 2026, which may help to explain why the shares are trading close to five-year highs.
Source: LSEG Refinitiv data
“The key to the investment case for AG Barr remains its efforts to rebuild profit margins after a torrid series of challenges and cost pressures over the past five years.
“The good news is that the company continues to adapt to changes in consumer tastes and trends, in terms of both product and its route to market, and drive cost efficiencies.
“The acquisitions of Rio and oat milk maker MOMA have both broadened its product portfolio, which is still spearheaded by the iconic IRN-BRU fizzy drink and its three other power brands, namely Rubicon, Boost and FUNKIN.
“The trading update suggests that all three of AG Barr’s key brands – IRN-BRU, Rubicon and Boost – have delivered good revenue growth, with the result that overall group revenues rose 5% year-on-year to £420 million. Analysts expect the same rate of progress for fiscal 2026, although chief executive Euan Sutherland may only comment on that when the full-year results are released in late March.
Source: Company accounts, Marketscreener, management guidance for 2025E, analysts’ consensus forecasts. Financial year to January.
“Even more pleasing is Mr Sutherland’s comment that AG Barr’s operating profit margin rose to 13.5% in the year to January. That handily beats the 12.3% generated last year and also exceeds the consensus analysts’ forecasts of 13.2%, although real sticklers will point out that the 13.5% figure excludes £5 million in restructuring charges relating to the merger of the Boost brands and a switch from selling directly to using wholesalers in the independent stores channel. AG Barr will highlight the benefit of those initiatives when it comes to expanding the profit margin. Including them would take the operating margin down to 12.3%, flat on fiscal 2024.
“Either way, the return on sales is still some way below the pre-Covid peak of 17.1% reached in 2018. However, the plan is that profit margins will now expand as sales increase and cost efficiencies are realised from the integration of Boost and the sales channel switch.
Source: Company accounts, Marketscreener, management guidance for 2025E, consensus analysts’ forecasts. Fiscal year to January.
“All other things being equal, improved profits should boost cash flow and cash flow will add to AG Barr’s already healthy net cash position. At the end of January 2024, the company had a net cash position of £53.6 million and that figure has now crossed the £60 million mark. AG Barr also has a pension surplus.
“Such solid finances permit AG Barr to invest in, and protect, its competitive position in the face of multiple challenges and also reward shareholders for their support with dividends.
“After a hiatus during the pandemic, AG Barr is firmly back on the dividend growth trail. New chief executive officer Euan Sutherland and the board sanctioned a 17% increase in the interim dividend and the full-year results in March may well offer a boost to the final payment too. Overall, analysts expect a 10% increase in the total dividend to 16.5p for the year to January 2025, with a further 12% advance to 18.4p in the coming year.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Fiscal year to January.
“Those figures equate to forecast forward dividend yields of 2.8% and 3.1%, respectively.
“They may not catch the eye of income-seekers, given the current 10-year gilts yield of 4.6%, but over the past decade AG Barr has still paid out 108p a share in dividends, despite Covid-19 and lockdowns, and the next two years alone offer the prospect of nearly 35p a share in additional payments. The Cumbernauld-based concern may therefore merit further patient support from investors, even if the shares do not look like an outright bargain on 18 times earnings for fiscal 2025, although 14 times for 2026 looks more enticing, if analysts’ profit forecasts prove accurate, given the earnings momentum, margin profile, cash flow and rock-solid balance sheet.
“It is also worth bearing in mind that AG Barr’s shares still trade more than 30% below their all-time high of summer 2019, when the stock traded on 30 times earnings. That rating will have been influenced by the zero interest policies that prevailed at the time, and the scramble for reliable earnings and cash flow streams that such policies provoked, wittingly or otherwise. As it turned out, investors mistook reliability for safety and by paying such a fat price they managed to render even a ‘safe’ stock dangerous, especially as unexpected events came out of the clouds to question even AG Barr’s reliability credentials.
“Former boss Roger White and the board have done much to help the company navigate a particularly difficult time and if Mr Sutherland can build on that foundation and show that AG Barr can still generate consistent profit and dividend growth then the stock could re-rate, even if arguing for a 30-times multiple feels like a bit of a stretch (at least unless interest rates go back to zero).”
