Why Nichols shares just dived 20%
There was no Christmas cheer for the drinks company after this sorry update.
23rd December 2019 11:07
by Graeme Evans from interactive investor
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There was no Christmas cheer for the drinks company after this sorry update.
Vimto maker Nichols (LSE:NICL) dealt a blow to its large band of AIM followers today by warning that it will start 2020 mired in uncertainty due to a tax headwind in the Middle East.
From being 26% higher in the year to date, shares opened 20% lower this morning to leave the soft drinks company trading at a level last seen in February.
That might attract the interest of bargain hunting investors if they think the blow caused by the 50% excise tax on non-carbonated drinks in Saudi Arabia and UAE is just short term.
A clearer picture probably won't emerge until July's interims as Ramadan, which accounts for approximately 80% of Vimto sales to consumers in the region, falls between April 23 and May 23 in 2020.
Source: TradingView Past performance is not a guide to future performance
House broker N+1 Singer is braced for a material impact but admits it is hard at this stage to forecast with too much certainty. It thinks the blow to annual profits could be between £2.5 million and £4 million, based on a 25% to 45% Middle East sales reduction and lower gross margin.
Alongside some increased caution on UK trading, the City firm today reduced its 2020 pre-tax profit estimate by 15% to £29 million. Even if the short-term Middle East outlook is “unhelpful”, N+1 Singer analyst Sahill Shan remains upbeat about longer-term prospects.
He said: “On a 12 month view we expect the company to continue outperforming operationally and investors to focus on its superior fundamentals.”
Nichols has been a staple holding for many investors thanks to its progressive dividend, strong balance sheet and geographic diversity. These qualities are why the AIM company's share price surged to a record high in the summer 2017 after rising more than 800% since 2009.
The stock rallied after the election and had been trading on a 2020 price/earnings (PE) multiple of 26 times, compared with a peer group average of 23 times.
In today's trading update, Nichols said it was pleased with its performance in 2019 after growing sales by about 4% in the face of a slowdown in the UK soft drinks market.
It added that Vimto in the UK had delivered growth against strong prior year comparatives, although N+1 Singer said it was prudently cutting its UK sales growth assumptions for 2020 from 6% to 3% due to the current market softness.
The Middle East is a key strategic market for the Vimto brand, with its sugar content and strong flavour making the cordial drink a popular way for Muslims to break their fast during Ramadan.
The Saudi Arabian and UAE tax authorities, however, have recently implemented an excise tax of 50%, to be levied on the retail price of non-carbonated sweetened drinks.
This tax will be applied regardless of whether the drinks contain either natural or artificial sweeteners. Unlike the UK soft drinks levy, this means product reformulation is not an option for Nichols.
To mitigate the impact, the company expects it will need increased investment in the Vimto brand in the Middle East to maintain its strong market position.
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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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.