Britvic has delivered another strong performance in H1, with organic constant currency revenue growth of 1.9%, organic adjusted EBIT margin up 30bps and adjusted EPS up 5.2%. The business capability programme (BCP) is due to be completed during H219, bringing higher capacity and increased flexibility to the company. Looking ahead, as capex and leverage normalise to lower levels, and planned returns and further growth from the BCP programme come to fruition, the wide discount to peers may narrow.
GB Stills revenue grew an impressive 4.9% y-o-y, with all three core brands showing improvements. The Robinsons brand has been successfully revitalised through a premiumisation strategy, which is attracting more consumers to the brand. GB Carbs successfully navigated the soft drinks industry levy (SDIL), though volume and revenue growth in H119 were affected by phasing of the SDIL introduction last year. By geography, total GB revenue was up 3.1%. Ireland revenues were down 0.9% due to soft on-trade alcohol sales through Counterpoint. France remained soft due to the managed volume decline in private label. Brazil and International were up strongly, though growth in the latter is expected to moderate during H2 as the company starts to lap distribution gains in the US.
Britvic’s strategy revolves around four key themes: (1) generate profitable growth in core markets; (2) realise global opportunities; (3) step-change its business capability; and (4) build trust and respect. This has generated good returns with a five-year EPS CAGR of 9.8% and DPS CAGR of 8.9%, and management believes it will continue to be a winning combination to deliver dependable and profitable growth. As the transformational BCP enters its final implementation phase during H219, capex should begin to normalise, while the benefits of the BCP should underpin long-term growth and cash generation.
Britvic trades at a consensus FY19e P/E of 15.9x, a 37% discount to the UK beverages sector, and a 45% discount to AG Barr (calendarised), reflecting its geared balance sheet, partial ownership structure and steady earnings growth. However, we believe that with sustained earnings and income delivery, and reducing balance sheet leverage, those discounts should narrow.