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Business Analysis & Features

The Investment Column: Britvic could yet provide sparkle

Moss Bros; BTG

Share price: 222p (+17.75p)

Britvic has not had the best of starts to its career as a listed company. The soft drinks group has had two profits warnings since its December float.

Yesterday, it told investors that its full-year results would miss forecasts. To blame are falling sales of fizzy drinks. Britvic has a 14-year licence to sell ranges from PepsiCo, including Tango and Gatorade, in the UK from which it generates about 40 per cent of total turnover.

The UK's growing obsession with healthy living has caused consumers to abandon fizzy drinks in favour of fresh juices and flavoured waters, although it is unclear exactly what is so unhealthy about carbonated drinks. Britvic is also under pressure from the launch of Coca-Cola's Coke Zero diet drink aimed at young men.

The company's interim results yesterday revealed a 9 per cent drop in sales of carbonated products. And things seem to have got worse over the past month as the sales decline has accelerated. Overall, the group reported a pre-tax loss of £5.3m for the 28 weeks to 16 April, compared with a profit of £20m for the same period in 2005 and a 5 per cent fall in sales to £323m.

Going forward, a lot is hinging on Britvic's marketing campaigns during the World Cup and Wimbledon. PepsiCo is a sponsor of the England team while Robinsons will sponsor Andy Murray and Tim Henman at this year's tennis championships. A new television advertising campaign featuring the two Wimbledon hopefuls is due to start soon.

Of course, the group also has a good stable of non-fizzy soft drinks, including J2O, which it invented in 1998, Fruit Shoot, aimed at children, and branded mineral waters. Still beverages account for about half of Britvic's revenues and are enjoying strong sales growth, so the group will not miss out on the fad for healthy living.

In the immediate aftermath of yesterday's profits warning, the stock hit an all-time low of 170p. However, it rallied strongly in the afternoon to close at 222p leaving the company valued at just 13 times forecast earnings. The shares are underpinned by a 4.5 per cent dividend yield, which is two times covered, and strong cashflows. They are so strong, in fact, that a private-equity bid for the company looks distinctly possible). Buy.

Moss Bros

Our view: Avoid

Share price: 84p (-1p)

There was further evidence of the weak state of the clothes retail arena yesterday when Moss Bross put out a slightly disappointing trading statement at its annual meeting. Although the menswear group reported a 1.5 per cent increase in like-for-like sales for the first 16 weeks of the current year, this figure failed to live up to the expectations of some analysts. The same was true of Moss Bros' guidance on profit margins which were flat. There were hopes they would rise.

Most brokers were hoping to see the retailer post a profit of about £7.5m this year. Given its present performance, Moss Bros will probably struggle to do so. Recent updates from the likes of French Connection and Next have highlighted the particularly difficult conditions on the high street for clothes retailers. The unseasonable weather has not helped matters and trading is likely to deteriorate during the World Cup as many men opt to watch the football matches instead of going out to buy a suit from the retailer.

Over the past three years, the retailer has had several makeovers and is now focused on selling fashion gear to young men, although it still carries ranges for City gents.

The key behind the recovery in profits at the company during this time has been the improvement in gross margins, which have gone from 44 per cent in 2002 to about 53 per cent today. This has been achieved by better buying of stock and less discounting.

Trading at 16 times forward earnings, Moss Bros shares stand at a premium to it peers, which is probably unjustified. There is better value elsewhere in the retail sector.


Our view: Buy

Share price: 172.5p (+12.5p)

After years of making promises to investors, BTG is finally starting to deliver. Yesterday's annual results made impressive reading. The biotechnology company, formed out of the old National Enterprise Board and privatised in 1995, swung into profit to the tune of £1.5m, compared with a loss of £34m last year, and revealed a 31 per cent rise in revenues to £50m.

Unlike most in the sector, BTG is now in a position to generate cash. Key to the near-term performance of its shares will be the timing of a licensing deal for its varicose veins treatment, Varisolve.

The group is known to be in talks with several possible partners, including major players in the pharmaceuticals industry, and an announcement is expected before the end of 2006. When it is unveiled, shares in BTG should rise sharply.

But Varisolve its by no means the group's only product. It has one of the healthiest pipelines in the sector, along with a £44m cash pile to fund it for the foreseeable future. Buy.