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Well done Fevertree I was wrong - but i struggle even more to see value at this price

By Gary Newman | Sunday 12 February 2017


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Fevertree Drinks (FEVR) is a company that I have admittedly been wrong about in the past – I like the product and way the business has grown, but thought the valuation was crazy!

If that was the case then, I think it is even more so now at a market cap of around £1.5 billion, and surely anyone who is investing in the shares at this sort of level is relying on a takeover bid, although I am struggling to see where one at a large premium will come from at these sort of valuations.

There is no doubt that the drinks that it produces are good – I am a fan of them myself – but the figures just don’t make sense to me and I struggle to see the company continuing to grow at the sort of rate it needs to, if it is ever going to justify its market valuation as compared to actual revenue and profitability.

The company recently released a trading update that showed that it is ahead of forecast for 2016, with those results announced on March 21.

The last set of financials up to the end of June showed that revenue was up by 69% as compared to the same period in 2015 and stood at £40.6 million, resulting in a net profit of just over £9.4 million for the six months. Revenue for the full year up to the end of December is expected to be circa £102.2 million, up 73% on 2015, which is obviously good as it shows the company has continued to see strong growth, but there will come a time when that starts to flatten off, or certainly slow down dramatically.

Currently the UK is still Fevertree’s strongest market, and revenue grew by 118% year-on-year, compared to 39% in the rest of Europe, 55% in the US and 88% in the rest of the world.

It is interesting to compare this to Britvic (BVIC), where annual revenue for the year up to the end of September was up 10% to some £1.4 billion, and net profit was up by a similar amount to £114.5 million – yet its market cap isn’t actually much higher than that of Fevertree, at around £1.67 billion. Revenue for the first quarter of 2017 up to December 25 was broadly inline with those figures, with revenue of £351 million, and up 4.3% on the previous year for the same period.

Obviously you can’t just compare the two directly as Fevertree is a much younger company and has been growing fast, but for me it is about pricing in too much of that potential at this stage, as well as whether the company will be able to continue the sort of growth which we have been seeing.

If you are buying into the company at these sort of levels, not only are you taking a risk on rapid growth being maintained, but you are also buying something that the market values at £1.3 billion, yet net assets at the end of June stood at some £72 million – it is worth noting that the company has very low levels of debt at around £6 million, and that net cash for the year end is also expected to be higher than previously anticipated, so it is in a strong position from a cash build point of view.

So although I do actually like this company, the way it is run and what it has achieved so far, I just fail to see where the value is or how it will be able to maintain the current levels of growth once it reaches a certain size. Plus for those hoping for a takeover, it also gets harder to see where a deal will come from at the current valuation.

So whilst I wouldn’t be rushing out to short Fevertree – I would tend to reserve that for companies where I can see actual financial problems or the like – I would certainly view it as a potential sell if I was holding, or one to avoid buying at over £13 per share, as there are plenty of shares out there which I believe offer more value now.

Regardless of that, well done to anyone who has been in for a while, especially if you were lucky enough to take part in the IPO at a 134p share price back in November 2014 when it first listed on AIM, as it has certainly been one of the success stories and shows that there are some proper companies as well on that market!

 


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