Interactive Investor

‘Buy’ rated Fevertree Drinks and Gamma shine as rivals dive

19th May 2022 15:33

Graeme Evans from interactive investor

Both companies have had a rough time lately, but these updates have encouraged buyers and the shares are outperforming.

The Queen’s Jubilee celebrations and robust trading in the US today boosted hopes that Fevertree Drinks (LSE:FEVR) is entering an “upgrade cycle” after the recent pummelling for shares.

Liberum analysts said it appeared City forecasts had now been “appropriately kitchen-sinked” in anticipation of higher raw material inflation being passed through by its suppliers.

Reinforced by today’s encouraging AGM trading update, they are backing the tonics firm to start showing structural improvements in profitability as the company moves into an upgrade cycle. The broker has a price target of 2,300p, which compares with 1,519p this afternoon.

The shares have declined 42% so far this year, with Liberum noting that a valuation of 35 times earnings appears more reasonable compared to the 10-year average of 48 times. It adds that the chief risk to its “buy” case continues to be the ability to pass on price increases if costs go up any further.

UBS, which has a price target of 2,660p, also drew encouragement today from Fevertree weathering cost pressures to reiterate earnings guidance for 2022 of between £63 million and £66 million. Revenues are also on track for between £355 million and £365 million.

Shares were broadly unchanged, which represented a decent performance when other consumer-focused stocks were sharply lower on fears of household spending caution.

Fevertree countered these worries today by saying that US consumer demand in the off-trade (alcohol consumed off premises, for example in supermarkets, off-licences, shops and online-stores) had been “very strong”, with recent sales growth of 150% over pre-pandemic levels.

It also anticipates a boost from summer trading in the UK, with strong plans put in place with retailers ahead of the Queen’s Platinum Jubilee celebrations next month. Pubs and other on-trade sites (bars, restaurants, hotels, nightclubs) were impacted by Omicron at the start of the year, but Fevertree said it continued to see recovery momentum build month to month.

Despite being a relatively new marketplace for the company, the US now accounts for more than a quarter of sales.

By continuing to scale production in the country through its local bottling partner, Fevertree hopes it will capitalise on the “substantial opportunity” and progressively reduce exposure to elevated shipping costs and delays

While Fevertree’s outsourced model allows for operational flexibility without the need for major capital investment, it has left it more exposed to cost headwinds. This was reflected in underlying margins falling from 22.6% to 20.2% in March’s annual results.

Other AIM-listed stocks showing resilience in an otherwise downbeat session included Gamma Communications (LSE:GAMA), with the business services provider telling shareholders at its AGM that it is “very positive” about prospects.

Based on trading in the first part of the year, it expects annual underlying earnings to be in the upper half of the range of market forecasts of between £101 million and £106.8 million.

Growth has been seen across its three operating segments, which span voice, mobile and data products and cloud-based services. Gamma added: “The business is in a strong financial position, which enables it to continue to invest in products and market development.”

Shares have come under pressure in recent weeks, but Peel Hunt raised its earnings forecasts by 6% today while reiterating its “buy” recommendation and price target of 1,890p. The stock added 20p to 1,140p.

The broker said: “Through the noise of cost inflation, wage and recruitment pressures, macro weaknesses, and going back to the office, Gamma continues to make progress.”

Gamma was AIM Company of the Year in 2018, having listed on the stock market with a valuation of £150 million in 2014. It is now worth just over £1 billion.

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