To kick things off, I am beginning with my first analysis, A.G. Barr (Ticker: LSE: BAG)
The assessment of this company and the reasons for this holding will be in the structure of my Investment philosophy.
(If you have not done so already, I strongly advise you read through my investment philosophy.)
1. Vigilant Leadership
The current management at A.G. Barr have displayed great consistency in performance and have managed the business splendidly.
- 2016: Debt/Equity ratio = 0.10
- 10 Year Ave. Debt/Equity ratio = 0.13
- 2016: Current ratio = 1.8
- 10 Year Ave. Current ratio = 1.6
- 2016 Return on equity = 19%
- 10 Year ROE Ave. = 20%
On a quantitive basis, the management at A.G Barr has consistently displayed they have the necessary competencies to avoid dangers of excess debt levels, as well as maintaining a high return on equity on a consistent basis. Implying good asset allocation abilities from a face value.
Management salary and remuneration:
- The 2016 remuneration report was supported by 99.9% of shareholders in latest AGM.
- The long-term incentive plan at A.G. Barr is focused on EPS targets on a cumulative basis
- Clawback provisions enable the company to recover up to 2 years of long term incentive plans and annual bonuses payments in the event of misconduct of management
- Eldest management member is in their early 50’s, henceforth adding a long-term sentiment on the management positions. This is great as the current management are already performing well!
2. Long-term Prospects
As opposed to technological advancements being the normal killer of businesses, in this situation, A.G. Barr operating in the soft drinks beverage industry is heavily prone to legislation advancements. In particular, the set to be 2018 Sugar tax being imposed in the UK.
Nonetheless, as mentioned by the company themselves, the combination of strong brand strength, on-going product reformulation and consumer driven innovation will minimise the financial impacts of a sugar tax.
In addition, at least two-thirds of the soft drinks branded by Barr will be sugar-free by 2018 (currently stands at 40% of soft drinks portfolio), and will therefore not be affected.
Energy drinks are the main beverage category that is driving consumer demand in the UK and globally, A.G. Barr is already well established and consistently innovating within this category.
Furthermore, the cocktail drinks category is also rising long-term consumer demand. A.G. Barr has made various acquisitions over the 2015-16 period to enter into this beverage category. Further expanded the company’s customer scope.
Soft drinks industry and A.G. Barr market share: (wholistic view)
The UK soft drinks industry contributes £16.1 Billion to the Uk economy, which is 0.35% of the total UK GDP in 2016.
Furthermore, 14.8 Billion litres of soft drinks were consumed in the UK (2014), with an average litre per capita of 203 litres between 2008-today. During this period the industry has seen an average value growth of 3.3%.
Carbonates dominate the surface space at 43%, followed by dilutes at 23%, water at 18% and fruit juice at 6% (respectively).
* It is good to note that 57% of soft drinks are now low and no-calorie products, this ensures the longevity of the industry.
Market Share holistic value:
A.G. Barr currently holds around 5% market share in the off-trade soft drinks industry in the UK (Source: Neilson soft drinks industry analysis).
203 litres consumed per capita x 5% = 10.18 litres of soft drinks consumed are approximately from an A.G.Barr branded product per person.
14.8 Billion litres of soft drinks consumed total x 5% = 704Million litres attributional approximately to A.G. Barr to grow into.
£16.1 Billion soft drink value (2016) x 5% = £805Million is approximately A.G. Barr’ worth in the UK soft drinks industry.
3. Stable and Understandable business economics
Stability: (Past 10 years of performance)
- Non-declining Earnings per share and net income
- Consistently paid and moderately grown dividends (ave. payout ratio 40%)
- Book value has grown consistently
- Return on equity has consistently been above 19%
- Current ratio has consistently been above 1.25
- Debt/Equity consistently been below 0.35 and much lower in recent years
Make: A.G. Barr produce high-quality soft drinks from 3 production sites within the UK. (Cumbernauld, Forfar and Milton Keynes.)
Move: Fleet of over 100 vehicles. Long-standing relationships with key distributing partners. Direct store delivery tailored to thousands of independent retailers.
Market: Market towards a broad range of consumers through social media, TV ads, sponsorships and others.
Sell: Work collaboratively with grocers, wholesalers, regional restaurants and independent retailers. Build long lasting relationships with all. Main growth driver is water category (as this is insensitive to weather conditions. Sell in geographies including the UK, ROI, Russia, China and others inside Europe.
Competitive advantages (MOATS!!!):
- successful business model for over 140 years
- Direct store delivery (builds stronger relationships with customers & suppliers)
- Strong and well-established brands (especially Irn Bru – largest market share in Scotland)
- Highest 5 Year Ave. net profit margin against nearest 4 competitors
- survived and prospered through times of crisis (Inc. 2001,2008)
4. Attractive Price to Valuation
From computing three (different) discounted cash flow indefinite analysis models taking the future cash flows of A.G. Barr and discounting them back to today’s present value using a 7% discount rate, to be Intrinsically valued between £4 and £5 per share. Which is £464 Million to £ 580 Million for the entire business A.G. Barr’s current market share and the total value of the soft drinks industry was also taken into consideration in this valuation, along with P/E, P/BV, EV/EBIT, FCF and other Important metrics.
* A.G. Barr should be viewed upon as a long-term investment holding, compounding growth and earnings into the future.
I hope you enjoyed this analysis, I am welcoming all comments and more in-depth discussions 🙂
Jordonlee W. Smith