Why AG Barr shares just surged 16%

Six months after an horrendous profits warning, a recovery is underway.

Drinks company AG Barr (LSE:BAG) put the shock of last summer's trading hiccup behind it today by revealing that its recovery was taking shape faster than the market expected.

To relief among its army of mid-cap followers, the Irn-Bru maker's shares bounced 14% to 617p as it said improving revenue trends meant profits for the year to January will be above the City's current range of between £34 million and £36.8 million. 

The end-of-year update will also alert new investors to a potential opportunity, given that house broker Shore Capital views Barr “as a core part of any UK mid-cap consumer equity portfolio”.

Shares were trading at a record 970p last summer, having rallied from less than 500p at the end of 2016. That progress was undone in spectacular fashion in July when a warning that 2019 profits would be down 20% on the previous year wiped 25% from its value.

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

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

This was exacerbated by some specific brand challenges, particularly for its 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 2018's heatwave.

Barr has regrouped impressively since the alert, with chief executive Roger White today talking about starting the new financial year with “confidence and a strong trading plan”. He added that the business was still highly cash generative after completing £30 million of share buy-backs in the period.

Shore Capital upgraded its forecast for 2019/20 profits by £1 million to £37.1 million, although that's still sharply lower than the £45.2 million recorded a year earlier. The broker sees a similar performance in the current period before an acceleration in 2021/22.

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Shore analysts Clive Black and Darren Shirley expressed their relief that decisive management action had helped steady the ship at the Cumbernauld-based company. They added: “AG Barr is a business with many fine traits, which we believe will be the basis to expect good onward growth. It is good to see the fizz back in the Bru.”

Shore added that Barr's premium stock rating was “merited”, with its shares still trading with a 2020 price/earnings multiple of 20.8x and a dividend yield of 3.1%. 

Investec Securities, meanwhile, has left its profit forecasts unchanged until we get more visibility from full-year results in March. They note that revenues are likely to have fallen 6.5% in the second half of the 19/20 financial year, compared with more than 10% in the first half.

Improved prices should also have bolstered the gross margin in the second half, with the company reporting signs that its new pricing position had gained acceptance.

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It has also increased innovation to support its struggling brands, including with three new Rockstar products and recipe improvement activity for Rubicon juice drinks. The company also recently launched an Irn-Bru energy drink.

Irn-Bru was launched in 1901 containing 32 separate ingredients and was originally called Barr's Iron Brew. The recipe remains a closely guarded secret known by only three people, two of whom are members of the Barr family.