A.G. Barr shares fall on Berenberg downgrade

A.G. Barr shares fell on Friday as Berenberg downgraded its rating on the stock to ‘sell’ from ‘hold’ and cut its target price to 470p from 530p, citing a “weak” trading update by the soft drinks maker.

In a 2 August trading statement, the Irn Bru maker said it expected a 2.9% year-on-year drop in first half revenues to £125m due to challenging market conditions. A.G. Barr said it had faced continued deflation and volume declines. The market’s overall performance was also expected to be hurt by poor weather in June and early July.

The company said if market conditions improve, it expects to meet its full year profit forecasts.

“In our view, this will be very tough to achieve as it requires both a significant turn around in sales performance and margin expansion,” said Berenberg.

“In addition, we feel that over the coming years the company could struggle to deliver on its key growth strategies and is likely to see margins come under pressure.”

Berenberg reduced its earnings per share estimate (EPS) by 5% for fiscal year 2017. It also lowered its forecast for EPS in 2018 and 2019 by 7% and 6%, respectively.

A.G. Barr has responded to a planned new sugar tax in the UK by announcing a new Irn Bru zero sugar variant called Irn Bru Xtra. However, Berenberg said it believes it could prove difficult to convert existing customers quickly and was unsure its new releases will substantially broaden the customer base.

The broker also reckons despite strong performances in international and Funkin sales, the businesses remain too small to contribute significantly to group growth.

Due to a weaker pound, A.G. Barr is likely to see the cost of raw materials purchased in foreign currencies increase notably in fiscal year 2018, Berenberg added.

“We expect the company to tightly control operating costs in order to counteract the issue, but believe the earnings before interest and tax margin will fall to 15.9% next year.”

Shares dropped 3.04% to 510.50p at 0916 BST.