Britvic well-placed to survive UK sugar tax (even though investors dumped it)

Greg Smith

Apr 21, 2016 – 12.00pm

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Britvic, the UK soft-drink group, is a good example of how investors sometimes sell on bad news without much thought. The UK budget in mid-March announced a tax on sugary drinks and this led to a sell-off in the sector.

Most company share prices have recovered, however, with Britvic's higher than it was a month ago.

The tax is set to be introduced in April 2018, giving the sector plenty of time to introduce new products. Drinks with less than 5g of sugar per 100ml are exempt but drinks with over 5 and 8 grams of sugar per 100ml will be hit with a tax of 18p and 24p per litre respectively.

The UK budget in mid-March announced a tax on sugary drinks Phil Carrick

The issue is not necessarily the initial tax rate but that the UK government may increase it every year.

The soft drinks sector, though, has already been moving to low sugar and sugar-free products due to a shift in consumer demand. Britvic is well ahead on this path with various "no or low sugar content" products launched some time before the government announced the sugar drinks tax.

In the last financial year the average calories per 250ml of drinks that the company sold was 35.4 compared with 37.6 in the previous year.

Healthier lifestyles

Britvic recently rebranded its key Drench brand (no artificial sweeteners, preservatives or flavourings) while Robinsons, its leading squash brand in the UK, was also relaunched with no added sugar in 2015. A low-calorie version of the J2O brand has also been launched and is reportedly going down well with customers.

In 2014 the group stopped selling added sugar to Fruit Shoot (a children's drink) in the UK as part of the group's "health commitments" aimed at tackling obesity and general diet concerns.

Britvic also owns the multivitamin fruit drink Purdey's which, along with the mineral water brands, should benefit from a shift to healthier lifestyles.

Britvic is becoming more international but continues to generate the bulk of its revenue and profit from the UK. A strong position in still drinks should also expose the group less to the sugar tax.

The company reported a weak start to the current financial year (organic revenue was down 2.4 per cent to £290.1 million in the 12 weeks to December 20) although trading in the Christmas period was "encouraging" in core markets.

Currency boost

Britvic's purchase of Brazilian squash manufacturer EBBA on September 30, 2015 also meant that reported revenue was up 4.8 per cent to £311.6 million. EBITDA guidance for the year to September 2016 was reaffirmed at £180 million-£190 million versus last year's £171.6 million.

GB revenues fell by 1.2 per cent in the first quarter as volumes declined. This was due to difficult trading in the grocery channel but the group saw value share progress with Pepsi Max a key driver.

Revenue from France and Ireland combined was 22.5 per cent of group revenue in the fiscal year to September 2015. The recent weakness of sterling against the euro may therefore provide a currency boost in the current year.

It is also notable that the Brazilian real has started to strengthen against the pound in recent months. This may make the company's £120.8m acquisition of EBBA well timed if the Brazilian real continues to show momentum.

Britvic is in our view relatively inexpensive with a forecast P/E of 15x for the year to September 2016, which falls to 13.3x by the year to September 2018.

The dividend yield on the shares is also expected to increase from 3.3 per cent in the current year to 3.8 per cent in the year to September 2018. The payout is 2x covered over the period allowing for retained earnings to be reinvested in growth initiatives.

Greg Smith is the head of research at investment research and funds management house Fat Prophets. For a free trial of Fat Prophets' daily market commentary please click here.