Brand strength and pricing power are enabling A.G. Barr (BAG) to grow faster than its rivals in the fiercely promotional UK soft drinks market. Shares in the IRN-BRU maker are popping 10p higher to 535p as investors welcome appetising half-year numbers and news of better-than-expected debt levels.


Web chart - Barr - 23 Sep 2013

Today's half-year figures reveal taxable profits up 12.3% to £16.6 million for the six months ended 28 July. This is before exceptional costs related to the group's aborted merger with larger beverages peer Britvic (BVIC), as well as costs pertaining to the establishment of the Glasgow-headquartered group's new Milton Keynes factory. Turnover rose 5.8% to £128.7 million, driven by a 7% valuer-terms advance in carbonates in value terms and 2% growth in still drinks. Overall, A.G. Barr can point to growth of 4.2% in volume terms and 1.6% in price.


As previously outlined by Shares, momentum accelerated in the second quarter, with the beverages business benefiting from its proven strategy of investing behind core brands IRN-BRU, Barr and exotic offerings KA and Rubicon. An additional tailwind came from July's excellent weather, which stoked demand for thirst-quenching soft drinks across the UK, while the strong performance of the Rockstar energy drinks brand was another highlight.


A.G. Barr, which also sells Orangina and Tizer, will start to derive benefits from its new 225,000 square foot facility in Milton Keynes in the second half. This site is alleviating pressure at the existing Cumbernauld facility in Scotland and will help Barr generate savings which can be reinvested to drive organic growth.


Given its geographic positioning, with Milton Keynes closer to key suppliers and customers in England, the investment should add momentum to the growing distribution of iconic Scottish soft drinks tipple IRN-BRU in England too. Looking to the second half, A.G. Barr should benefit from its increased manufacturing capacity, although the company does face tougher revenue comparatives.


In further positive developments, A.G. Barr proposes an 8% hike in the half-year dividend to 2.825p, a payout covered four times by earnings per share (EPS) up 12.6% to 11.34p and underpinned by £18.1 million of free cash flow generation. This enabled A.G. Barr to pare debt by 40% to a better-than-expected £15.8 million.


Wayne Brown, analyst at Canaccord Genuity, has a 'buy' rating on A.G. Barr and raises his target price by 10.5% to 630p. He writes: 'It is easy to understand why AG Barr enjoys a premium rating. A combination of returns on capital well in excess of the company cost of capital and strong growth in the invested capital base have created significant levels of shareholder value.'


Panmure Gordon duo Damian McNeela and Graham Jones are sticking with their 'hold' rating and 560p price target. 'Our assertion remains that A.G. Barr is a well-run company,' they enthuse in a note this morning, 'with a strong balance sheet and continues to deliver against its organic growth strategy'.

Issue Date: 23 Sep 2013