ii view: cider maker C&C Group crashes on profit warning

Year-to-date trading update

ii round-up:

C&C Group (LSE:CCR) today detailed expected annual profits below that achieved last year, with uncertainty around the UK Budget and a preference for beer over wine and sprits weighing on the group’s drinks distribution business. 

Despite trading that matched expectations for the Christmas fortnight, softer than anticipated hospitality demand and an adverse product mix during November and early December have been a drag, with weak demand continuing into January. Adjusted operating profit for the financial year to late February is now expected in a range of €70-73 million (£61-63.5 million) compared with last year’s €77 million (£67 million).

Shares in the Dublin headquartered company fell 10% in UK trading having come into this latest news down by close to a tenth in the last year. That’s better than a more than one-third fall for Guinness and spirits maker Diageo (LSE:DGE). The FTSE All Share index rose by a fifth last year. 

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As well as making drinks including Tennant’s, Bulmer’s and Magner’s, C&C is also a leading distributor of beverages to the UK hospitality sector via its Matthew Clark Bibendum business. 

The group’s own drink brands traded well over the festive period, aided by management’s focus on new innovation.

C&C continues to anticipate solid underlying cash generation for the year, with a strong balance sheet and significant liquidity and covenant headroom.

Plans to return €150 million to shareholders via a combination of dividends and share buybacks over the three fiscal years to 2027 remain intact, with €92 million already returned.

C&C expects consumer and economic headwinds to continue into the next financial year, with profits likely to come in broadly similar to this year. 

Full-year results to late February are scheduled for 19 May.  

ii view:

C&C’s well-known drink brands sit alongside craft ciders and beers such as Orchard Pig, BlackThorn, Menabrea and Clonmel Irish lager. Branded or drink-related profits totalled 60% over the group’s last financial year with distribution the balance of 40%. Geographically, the UK accounted for most sales at 81%. That was followed by Ireland at 18%, and other countries including the US at 1%.  

For investors, a pressured UK consumer and extra taxes have affected business. The impact of the weather on sales should not be forgotten. Previous operational challenges have included a new computer system and the pandemic, while C&C lacks the geographical diversity of sales found at rival drink makers such as Pernod Ricard SA (EURONEXT:RI).   

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More favourably, strong brands sit alongside a diversity of operations given both brewing and distribution. A focus on strengthening the profit margin at the distribution business exists via disciplined pricing and revenue management. Group initiatives include operational simplification and cost discipline, while the group’s ratio of net debt to adjusted profits of 1.1 times as of late August is inline with management’s medium-term target. 

For now, management initiatives, strong brands, forecast dividend yield of over 4% and a comparatively cheap share price, might attract some speculative interest. But for others, a near halving of the share price over the last five years to prices not seen since 2009 generates caution. More cautious investors might prefer to wait for signs of a turnaround.

Positives: 

• Strong brand names
• Diversity of operations

Negatives:

• Uncertain economic outlook
• Exposure to fuel prices given distribution and brewing

The average rating of stock market analysts:

Buy