Shares: Hot summer adds the fizz: The climate is right for a sparkling performance from the leading soft-drinks makers, Quentin Lumsden reports

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The Independent Online
THIS YEAR'S warm June weather contrasted starkly with 1991's rain-sodden disaster. Given the comments of Robin Barr, A G Barr's chairman, that weather conditions far outweigh recession in determining soft-drinks sales, the UK's three leading soft-drinks companies, Cadbury Schweppes, Nichols (Vimto) and Barr, should be off to a flying start this summer. Because of the steep slide in share prices generally in June, however, the share prices of the three are not yet reflecting their prospects.

The classic example is A G Barr, which has just reported a brilliant first half, with pre-tax profits up almost 80 per cent to pounds 2.64m. Although the figures were way ahead of market expectations, the shares rose just 10p to 275p on the news. Yet the exciting point is that this dramatic performance is for the six months to 25 April, and was achieved on a sales increase of just 3 per cent. The weather boost, reflected in sales running 20 per cent ahead in the 10 weeks' trading since April, is going to raise second-half profits and leaves the group on course for a brilliant year.

An important caveat - stressed by Mr Barr - is that much depends on the rest of the summer. But there are still strong reasons for feeling positive. A G Barr is a Scottish-based company with a key brand, Irn-Bru - 'brewed from girders' - which holds a 17 per cent share of the Scottish market, putting it in second place between Coca-Cola and Pepsi. It is now making a determined push to increase its share in markets south of the border.

Barr has two other brands, Tizer, an English kiddies' version of Irn-Bru, and St Clements, a maker of squashes, acquired at the end of the Eighties. The acquisition came near to doubling sales, but turned pounds 6m of net cash into debts of pounds 11m and left the group exposed when carbonated-drinks sales fell in 1991.

The group has emerged from this tough period in great shape because, after some deliberation, it has closed one of the plants that came with the acquisition and switched production to its two other English plants. Now it is in the happy position of having lower costs and increased demand. There is also a shift from lower-margin own-label to high-margin branded products. One analyst who had been looking for pounds 4.5m for the year has whacked his forecast straight up to pounds 6m and even that could easily be too low. On pounds 6m the prospective price-earnings ratio at 275p of 12.5 looks excellent value.

Next month interim figures are due from the UK's other specialist quoted soft-drinks company, Nichols (Vimto), maker of Vimto, a strong seller in the Manchester area where the company is based. The June weather has boosted second- half sales and should put some fizz into the statement accompanying the figures. But the shares have already rocketed from a low point around 160p in early 1991 to 485p.

Much of this rise represents recovery from an absurdly depressed level in the run-up to the Gulf war. Vimto is highly prized in the Muslim world as a non-alcoholic drink during religious fasts such as Ramadan. About 30 per cent of group sales go to the Middle East, with Egypt currently the focus of a strong drive. With a strong balance sheet of pounds 6m in cash, the shares do not look expensive on a prospective p/e of under 14, particularly if current- year forecasts of just over pounds 8m turn out to be too low.

The giant of the sector is Cadbury Schweppes, which makes around half its profits from soft drinks and dominates the UK market through its joint venture with Coca-Cola. The Cadbury beverages group has quadrupled profits since 1985 with dramatic productivity gains and is expected to have an excellent 1992. On prospects of current-year earnings per share moving ahead modestly to just over 29p, the prospective p/e of 16 at 466p looks undemanding.

(Photograph omitted)

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