Vimto maker Nichols sparkles compared to rival

Today’s results from Vimto maker Nichols (LON: NICL) are in stark contrast to yesterday’s trading statement from IRN-BRU maker AG Barr (LON: BAG) (see https://ukinvestormagazine.co.uk/irn-bru-maker-ag-barr-goes-flat/).

AIM-quoted Nichols grew revenues by 10% to £71.6m in the six months to June 2019. However operating margins declined from 20.1% to 18.6%, so pre-tax profit edged up from £13.1m to £13.3m.

The interim dividend is being increased from 11.3p a share to 12.4p a share. There is £29.5m in the bank. This figure has fallen through a combination of acquisition spending and higher working capital, but this is a strong position for the company.

The Vimto brand continues to grow although the rate has declined. Even so, the 4% growth in the first half was similar to the soft drinks market. Trading has been tough for Nichols in the UK because of the sugar tax, but it has not found it as hard as others.

Comparisons

AG Barr’s interim revenues are going to be 10% lower and earnings per share could fall by around one-quarter. There is a big difference in its fortunes to those of Nichols and there are some obvious reasons why. One is the international spread of Nichols.

AG Barr generates 96% of its revenues in the UK, whereas Nichols generated one-fifth of its revenues from international markets, and in this period, they recovered from a disappointing contribution in the first half of 2018.

Nichols has always been strong in the Middle East and it accounted for more than 6% of sales. There was also growth in Africa.

Feel Good

Vimto does not dominate results as much as IRN-BRU does for AG Barr. Nichols acquired Feel Good Drinks in July 2015. This provided a range of soft drinks with no added sugar. This means that it is well placed for the post-sugar tax market.

The Nichols customer base is also more diverse than AG Barr because it has a division focused on supplying soft drinks to be dispensed and sold in bars and restaurants. This makes it less dependent on direct consumer spending on its brands in shops, where there is likely to be wider competition than in bars.

Prospects

Full year pre-tax profit could grow from £31.8m to around £33m. At 1662.5p, the shares are trading on 23 times prospective earnings. That is slightly lower than the prospective multiple for AG Barr.

It could be argued that AG Barr has recovery potential, but Nichols consistent track record appears to warrant the multiple. The forecast yields are both around 2.5%, but the Nichols dividend is covered 1.8 times, against 1.5 times for AG Barr.

Both companies have strong brands, but Nichols appears the more attractive investment.

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Andrew Hore
Andrew Hore is the publisher of AIM Journal, which is an online monthly publication covering the Alternative Investment Market.