AG Barr starts comeback, but M&C Saatchi slumps

The fizzy drinks maker may be on the road to recovery, but this ad giant is a falling knife.

The paths to recovery at AG Barr (LSE:BAG) and M&C Saatchi (LSE:SAA) diverged today after the drinks maker today appeared to draw "a line in the sand" following July's shock profits warning.

Ad agency Saatchi, in contrast, remains under pressure after it disclosed that full-year profits were likely to be between 5% and 10% below estimates. The AIM stock is already the subject of an accounting review by PwC that should be complete by November.

This was set up after Saatchi's independent auditor raised concerns about accounting controls, mostly relating to the timing of revenue recognition and incorrect accounting of some assets and liabilities in UK subsidiaries.

Saatchi's shares fell another 10% to 154p today and have now lost half their value since the company said in August that it expected a one-off accounting charge of £6.4 million alongside this year's results, mostly as a result of specific issues identified in the review.

Source: TradingView Past performance is not a guide to future performance

Today's interims included some of the misstatements already identified, resulting in a net charge of £5.1 million within 2018 figures. However, the headline revenue and profits figures were still impacted by a larger number of loss-making entities, particularly start-ups, and the second half  timing of revenues in 2019.

Chief executive David Kershaw said:

"Whilst this has had a short term impact on our results, we remain confident in and committed to our strategy of winning new business and investing in new, fast-growing businesses."

Saatchi pegged its half-year dividend at 2.45p a share but said its balance sheet now showed net cash of £9.5 million, compared with £2.2 million of net debt in December.

AG Barr, meanwhile, sounded a more optimistic note after it said it was on track to meet the revised guidance contained in this summer's profits warning, when shares crashed 25% after the FTSE 250 Index-listed stock said 2019 results would be down 20% on the previous year.

Part of the reason for the downgrade was that Barr had returned to a more normal pricing strategy after last year's short-term focus on volumes, when it needed to support its flagship Irn-Bru drink in the wake of sugar-related recipe changes.

This was exacerbated by some specific brand challenges, particularly in Rockstar energy and Rubicon juice drinks. Disappointing spring and early summer weather in Scotland and the north of England made matters worse given comparisons with last year's heatwave.

Source: TradingView Past performance is not a guide to future performance

Earnings per share declined to 9.83p in today's results, compared with 12.74p a year earlier, while revenues were down to £122.5 million from £136.9 million. The half-year dividend still increased by 2.5% to 4p.

Chief executive Roger White admitted the half year had been disappointing, but pointed out that the company was now entering a period of less demanding trading comparisons. He added:

"As our new pricing establishes and our strong second half brand plans take effect, our focus is now on returning to long-term growth."

House broker Shore Capital called the results "a helpful line in the sand" following the July profits re-set, adding that the recent setback should be seen in the context of an otherwise sustained track record on trading execution and delivery. 

Shore continues to view the company as a core holding in the UK consumer sector, given Barr's high-quality portfolio of brands and strong record on innovation. Shares were 5% higher at 615p today, but still remain well short of the 863p seen in July.

According to Shore's unchanged estimates, Barr trades with a 2020 price/earnings multiple of 22.3 times. This compares with between 28 and 30 times prior to the profits warning, and a 16% premium to a selection of soft drink peers at 19.2x.