Premium carbonated mixers phenomenon Fevertree Drinks’ (FEVR:AIM) shares are fizzing higher yet again, as the AIM star turn says 2017 profits will be ‘materially ahead’ of already-upgraded market expectations.
In a palate-pleasing pronouncement, the high-end tonic water, ginger ale and cola supplier declares the strong growth seen in the first half of calendar year 2017 has continued during the second half, news that stirs yet another round of earnings upgrades and sees the shares sparkling with a 9.2% gain to £21.41.
INGREDIENTS FOR GROWTH
‘Fever-Tree's pioneering focus on taste and ingredients continues to transform the global mixer category driving growth across all the group's regions,’ says the soft drinks brand, the brainchild of co-founder and CEO Tim Warrillow and non-executive deputy chairman Charles Rolls (pictured below), whose exciting growth story has previously been championed by Shares.
Launched in 2005 to provide high quality mixers which could cater to the growing demand for premium spirits, Fevertree is riding a global renaissance in appetites for gin, but also increasingly for vodka, rum and whisky.
Fevertree insists ‘the exceptional performance in the UK, the Group's largest market, has been particularly impressive with the rate of sales growth and momentum strong across both the on and off trade.’
GROWING LIKE TOPSY
Fevertree is also growing fast overseas, generating roughly 56% of sales away from the UK’s shores in 2016. But as Warrillow explains, ‘the exceptional performance in the UK, the group's largest market, has been particularly impressive with the rate of sales growth and momentum strong across both the on and off trade.'
Investec Securities explains: ‘A driving force has been a very strong performance in the UK. Having reported over 100% UK growth in the previous four half year periods, we had expected some degree of slowing, but growth has continued at a very healthy level in both the on- and off-trade.'
The broker continues: ‘For the full year, we expect the UK to grow by over 70% still. Despite some noise around competitor activity, Fever-Tree has been responsible for 97% of the growth in the UK retail mixer category over the previous 12 months (according to market data to the end of the third quarter).’
Over at Shore Capital, analyst Phil Carroll writes: ‘Fevertree has issued a short trading update stating that strong momentum has continued across the business but especially in the UK and notably not in this instance as a function of distribution gains but more through strong rates of sales.’
Following the update, Investec Securities’ Nicola Mallard reiterates her ‘buy’ rating and increases her Fevertree price target from £22.20 to £23.30. For 2017, Mallard’s top line forecast rises 6% to £158.3m (2016: £102.2m) - that’s 55% year-on-year revenue growth - but her pre-tax profit (PBT) estimate is upgraded by 11% to £54.5m (2016: £35m) ‘thanks to operational gearing benefits’.
For 2018, Mallard sees pre-tax profit bubbling higher still to £55.9m, though Fevertree’s sales growth rate is expected to slow to 15%, with earnings per share forecast to increase from 37.8p to 38.5p.
Shore Capital is ‘upgrading our forecasts which are already ahead of consensus going into today’s statement. Full year 2017 forecast revenue will increase to £158m from £154m but the leverage impact through the income statement is strong with PBT increasing to £53.3m from £50.5m. This equates to an increase in EPS of 6% to 37.4p from 35.4p.'
Based on Carroll’s estimates, Fevertree trades on a prospective price-to-earnings ratio north of 57 times. ‘We believe the valuation remains full although we expect the share to gain back some of the recent lost ground’, writes Carroll.
‘The key point for us looking forward now is assessing the strength of momentum alongside the leverage potential with today’s upgrade achieved with a lower level of market spend than expected.
'This could suggest stronger profitability than is currently suggested in consensus expectations ahead of the delivery of strong than expected revenue growth. For now we retain our hold recommendation.'
