Interactive Investor

Insider: more buying at Fevertree and a new FTSE 250 company

AIM’s favourite drink mixers company has fallen by a third since the summer to a nine-month low, which has triggered director share buying. Bargain hunters have also snapped up a young mid-cap firm which has never been so cheap.  

30th October 2023 08:59

by Graeme Evans from interactive investor

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A £25,000 hit on the value of Fevertree Drinks (LSE:FEVR) shares bought last month hasn’t deterred one of its directors from making a second much bigger investment worth £420,000.

Drinks industry veteran Kevin Havelock, who has been a non-executive member of Fevertree’s board since January 2018, made last week’s move at an average price of 1,019.4p.

Shares have been under a cloud ever since that update, closing on Friday at 969p for a valuation of £1.1 billion, after a week in which broker Peel Hunt reiterated its “reduce” recommendation and 850p target price.

The City firm noted that Fevertree shares trade on 30 times 2024 earnings forecasts, which it said required strong growth on both revenues and margins in order to be sustained. It added that continued success in America — now Fevertree’s largest region — was essential.

Havelock, who has held a number of senior positions at Unilever, continues to have confidence in prospects after taking his stake in the AIM-listed company to over £2 million.

The £55,000-a-year director has been a regular buyer of shares, including last autumn when they were languishing at 835p during the UK stock market’s mini-Budget sell-off.

They rebounded to above 1,450p by May as investors welcomed signs of easing cost pressures and the company’s growth momentum in the US, Italy, France and Australia.

At one point in 2018, Fevertree traded on 70 times forecast earnings for a market value of £4 billion, a level that made it the toast of those retail investors who bought shares on the way up.

The momentum reflected the benefits of a largely outsourced business model, which gave Fevertree the flexibility to pursue opportunities in new markets including the US.

However, this also left it more exposed to significant cost headwinds, such as the recent spike in glass prices and labour shortage pressures on America’s east coast.

September’s £6 million downgrade to 2023’s profit guidance to £30-£36 million, and worries over how elevated interest rates will impact consumer confidence, have also contributed to shares falling back to where they were last autumn.

In the recent half-year results, revenues rose 9% year-on-year to £175.6 million after a standout performance of 40% in the US. The adjusted earnings margin reduced 780 basis points to 5.8%, but Fevertree said it expects this to rebound to 15% next year.

Half-year earnings fell 54% to £10.2 million, but AIM’s highest dividend payer of 2022 still sweetened this month’s interim distribution to shareholders by 2% to 5.74p a share.

Analysts at Jefferies have raised their price target by 200p to 1,350p but stopped short of a “buy” recommendation. UBS also has a “neutral” stance but recently highlighted industry figures showing Fevertree’s strong growth in America had continued during September.

However, Peel Hunt warned in this week’s note that the company has a long way to go before its long-term margin ambitions are reached: “Whilst earnings will grow from here, we believe the potential is shrinking and the risk concentrating.”

Good news not in the price

The share price slide for newly-listed Dowlais Group (LSE:DWL) since the GKN Automotive owner posted results in mid-September has been followed by three insider purchases.

The latest investment involved senior independent director Celia Baxter, who spent £31,000 on the FTSE 250 stock at a price of 88.4p, not far off their lowest level ever. Her move on Thursday followed chief financial officer Roberto Fioroni and non-executive director Philip Harrison, who made investments worth £50,000 and £10,000 respectively when shares were above 100p earlier this month.

Dowlais traded at 117p on the day of April’s demerger from “buy, improve, sell” owner Melrose Industries before rallying to 145p in the following month.

Maiden half-year results last month showed a performance ahead of the company’s expectations, with double-digit revenue growth, significant margin expansion in a period of high inflation and better than expected free cash flow generation.

Full-year guidance was unchanged amid strong booking trends for the GKN Automotive business, the vast majority of which were electric vehicle related.

Analysts at Jefferies described the 7% results-day fall for shares as “very harsh” as the US bank reiterated a price target of 170p. It said Dowlais benefited from a focus on best-in-class profitability, as well as exposure to the electrification and China growth stories.

GKN Automotive generated about £4.2 billion of revenues in 2022, supplying 90% of global manufacturers and contributing technology to about 50% of all vehicles. However, no single customer represents more than 14% of its sales.

In Powder Metallurgy, the growth opportunities include sintered rare earth magnets for electric motors. There’s also an early stage hydrogen business, focused on transforming the way energy is stored.

On Friday, Peel Heel highlighted a price target of 180p. It said the tough start as an independent company created an opportunity to buy into market-leading businesses with a “coherent strategy” to take margins to 11% from the 2023 forecast of 6.6%.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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