Nichols — Juicy profits and cash generation

Research: Consumer

Nichols — Juicy profits and cash generation

Nichols’ FY23 results showed good progress made as the Packaged business continued to drive growth through product innovation and geographic expansion. Inflationary pressures were largely mitigated and the benefits from the restructuring of the Out of Home (OoH) business are starting to come through, leading to improved profitability. Free cash flow generation was very strong in the year, resulting in an improved net cash position of £67.0m (vs £56.3m at end-FY22). Given the high levels of cash on the balance sheet, management is assessing capital allocation options, including continued investment in the business, returns to shareholders and M&A opportunities.

Written by

Milo Bussell

Analyst, Consumer and TMT

Consumer

Nichols

Juicy profits and cash generation

Consumer

QuickView

12 March 2024

Price

1,040p

Market cap

£381m

Share price graph

Share details

Code

NICL

Listing

AIM

Shares in issue

36.5m

Business description

Nichols is a soft-drink beverage company with headquarters in the UK. The company sells into both the stills and carbonate categories. Its brand portfolio includes Vimto, Feel Good, Starslush, ICEE, SLUSH PUPPiE, Levi Roots and Sunkist. Nichols’ primary operations are in the UK, Middle East and Africa.

Bull

The soft drinks segment is relatively resilient.

The group has broad geographic revenue diversification, with products in over 70 countries.

Nichols has restructured its OoH business, resulting in a greater focus on profits and clearer reporting lines.

Bear

The outlook for consumer demand remains uncertain given the macroeconomic environment.

Inflationary pressures within input costs remain uncertain.

Some brands are third-party owned.

Analysts

Milo Bussell

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Nichols’ FY23 results showed good progress made as the Packaged business continued to drive growth through product innovation and geographic expansion. Inflationary pressures were largely mitigated and the benefits from the restructuring of the Out of Home (OoH) business are starting to come through, leading to improved profitability. Free cash flow generation was very strong in the year, resulting in an improved net cash position of £67.0m (vs £56.3m at end-FY22). Given the high levels of cash on the balance sheet, management is assessing capital allocation options, including continued investment in the business, returns to shareholders and M&A opportunities.

Good progress in FY23

Nichols delivered robust revenue growth in a tough consumer environment, up 3.5% to £171m. Growth was driven by good progress in the Packaged business (+6.1%), which more than offset the decline in OoH (-3.4%) following the division’s restructuring. Despite ongoing inflationary pressures gross margin broadly held up at 42.3% (FY22: 43.1%). Adjusted PBT grew 8.7% to £27.2m given the improved profitability in both Packaged and OoH. Strong free cash flow generation of £20.9m (FY22: £14.6m) resulted in an improved net cash position. Due to the strong performance, management has proposed a final dividend of 15.6p, resulting in an increased total FY23 dividend of 28.2p (FY22: 27.7p).

Innovation to continue driving strategy

Nichols made good progress in FY23 in its growth strategy, which is focused on its four pillars: more from the core, thirst for new, fuel for growth and happier future. Achievements included securing a new distribution partner in the Ivory Coast, launching Vimto Energy in the fast-growing UK energy segment and initiating the business transformation programme (to drive efficiencies). In FY24, the focus is on expanding sales into new geographies in Africa to further develop production facilities, while also driving innovation in Vimto products in the UK and Middle East. Management potentially plans to utilise net cash to fund M&A opportunities, targeting growth segments such as functional or health focused drinks.

Valuation: International reach boosting valuation

Nichols trades at a premium of 11% and 14% on median consensus P/E multiples to its UK beverage producer peers, for FY24 and FY25 respectively. This, in our view, reflects its international reach in its growing markets of Africa and the Middle East, as well as its unleveraged balance sheet, unlike other peers.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

164.9

25.0

55.32

27.70

18.8

2.7

12/23

170.7

27.2

56.39

28.20

18.4

2.7

12/24e

176.7

29.1

60.00

30.24

17.3

2.9

12/25e

184.1

31.0

63.41

31.70

16.4

3.0

Source: Refinitiv (priced at 7 March 2024)

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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