Vimto maker Nichols (LON: NICL) managed to negotiate the tough trading conditions last year and improve its profit. The sugar tax in the Middle East will provide even more challenges this year.
Adapting to the UK sugar tax and the summer, which was not as hot as in the previous year, Nichols still managed to increase its UK revenues. Higher international revenues meant that 2019 group revenues were 3.5% ahead at £147m. The gross margin also improved from 45.7% to 47.6% because of the greater international contribution.
Pre-tax profit improved from £31.8m to £32.4m and the cash balance also improved from £38.9m to £40.9m. This increase in cash was achieved even though the dividend continues to rise. There is a 6% increase to 40.4p a share in 2019.
A new tax on sweetened juice drinks was introduced on 1 December in Saudi Arabia and the UAE. The Middle East dominates international sales, with around four-fifths of sales in the region during Ramadan, which starts on 23 April this year.
This means that the effect of the new tax, which covers natural and artificial sweeteners, will not be understood until the end of Ramadan.
A 50% tax on the retail selling price is likely to have a significant effect. The average price of a bottle of Vimto will rise from £2 to £3. The additional cost will be absorbed partly by Nichols and partly by a higher consumer price. Nichols will take the hit for part of the tax and spend more on marketing and supporting the trade.
Management guidance is a profit hit of between £2.5m and £4m. Vimto is a popular drink in the Middle East but that will only go so far after a large price rise.
There are growth areas for the group. A contract has been won to supply frozen beverages to the Showcase cinema chain. Also, the European football championships and Olympics – assuming they are not hit by the Coronavirus – provides a better backdrop for the year. There is also potential growth from other international markets.
Whatever happens, Nichols is likely to make a lower profit this year. N+1 Singer forecasts a 2020 pre-tax profit of £29m before a steady improvement in subsequent years. The forecast assumes the worst case scenario.
The broker also expects a continued increase in both the dividend and the cash pile. That provides potential for acquisitions, but management has high standards for any deal.
At 1297.5p, Nichols is trading on 20 times prospective 2020 earnings. The forecast yield is 3.2%. This rating reflects the attraction of Nichols for IHT portfolios.
Interims will be announced on 22 July. This will provide more information on what the full year outcome will be.