RBC Capital upgrades Fevertree as confidence in US ‘restored’

RBC Capital Markets upgraded its rating on shares of posh tonics maker Fevertree to ‘outperform’ from ‘sector perform’ and hiked the price target to 2,500p from 1,100p as it said its confidence in the US is "restored” and the company’s Covid-19 momentum looks sustainable.

RBC said the US is definitely performing better than it had expected.

It said that after stripping out moving parts such as the on-trade shutdown, consumer stockpiling and price cuts, there has been a substantial multi-month improvement in the underlying business.

"We've sense-checked this - household penetration, repurchase rates and social media brand 'buzz' are also growing," it said. "This is even more impressive when you account for the fact that 30% of the marketing opportunity disappeared back in March and distribution gains have been slowing."

RBC said growth rates will normalise from current levels as lockdown eases, price cuts come in and Fevertree cycles last year's distribution gain. However, the bank’s confidence in the US story has been restored.

It estimated the US gross margin is 100 basis points below group level. That said, the adverse mix impact of US growth will be offset by the operating leverage it can drive thanks to half of Fevertree’s operating costs being fixed.

"After reinvesting in its international regions, we estimate 10bps of margin growth for Fevertree going forward," it said. "Our reduced margin forecasts are more than offset by uplifted sales expectations."

At 0950 BST, the shares were up 1.5% at 2,083p.