Berenberg initiates coverage of mid-cap drinks makers

Berenberg initiated coverage on the four UK mid-cap soft drinks manufacturers, highlighting a preference for Britvic and Nichols.

“We feel this market is often overlooked by investors due to the lack of absolute growth in the end-markets. However, we believe these businesses score well on several elements relative to our broader UK mid-cap coverage.”

The bank said they typically generate strong and stable margins driven by operating efficiencies, they can deploy capital on value-accretive M&A, and they have demonstrated a good level of success by UK and international expansion.

It started Britvic and Nichols with a ‘buy’ rating and 850p and 1,450p price targets, respectively.

The bank said its preference for these two was mainly due to a combination of a propensity for future EPS upgrades and reasonable valuations.

On Britvic, it said EPS momentum was stabilising and there are several areas that could surprise to the upside, such as margin uplift from supply chain investment, Fruit Shoot’s move into the $2bn US multipack market, and the International division returning to profitability.

“We believe these upside risks are not reflected in the current 14.3x FY 2016E P/E multiple, which makes the stock the cheapest among soft drinks peers and in the broader consumer sector.”

As far as Nichols is concerned, it said recent acquisitions of Feel Good and Noisy Drinks have helped drive strong EPS momentum. In addition, the company generates much higher margins and return on invested capital than most peers.

Berenberg started AG Barr and Fevertree with ‘hold’ ratings and 550p and 570p targets, respectively.

It said Fevertree was an exciting prospect and demonstrates many of the characteristics it looks for, but growth potential is more than reflected in the valuation.

On AG Barr, it said the group has a number of opportunities but it is too early to be confident of success, so the current valuation is justified.