Why shares in Vimto and Slush Puppie maker continue to reward investors after 100 years
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Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
A first-ever capital markets day from soft drinks specialist Nichols shows how this well-run business continues to develop, as management implements distinct strategies for all three parts of the company – packaged drinks for the UK market, packaged drinks for overseas markets and the out of home (OOH) segment, which serves the hospitality industry.
The roll-out of an SAP-based enterprise resourcing planning software supports a business transformation programme that should deliver ongoing productivity gains, to the benefit of margins, even as the company invests in its brand range, which includes Vimto, Slush Puppie and Levi Roots.
The plan is to increase share in the UK market, which represents around half of group sales, accelerate growth in the overseas business, which generates a quarter of revenue (primarily from the Middle East and Africa), and work on costs in the OOH operation. The OOH business is already delivering here, as it ceases to supply unprofitable customers, improves procurement and targets cost efficiencies.
The key question for investors now is to decide whether Nichols can successfully deploy these strategies and in turn meet its medium-term financial goals. Chief executive Andrew Milne and the board are targeting a 30pc uplift in sales, an extra 250 basis points (2.5 percentage points) in profit margin and a 50pc increase in pre-tax income to £45m.
Assuming a 25pc rate of corporation tax and an unchanged share count, this implies an earnings per share figure of more than 90p and thus a forward earnings multiple of barely 14 times. That would look low for a business with an operating margin of 20pc, high returns on capital, a debt-free balance sheet and a record of consistent cash generation.
All of those facets underpin dividend payments. The 6.6pc forward yield for this year may be a little deceptive, as it owes much to the autumn’s 54.8p-a-share special payment, although that welcome sum takes the total banked since our initial analysis to 259.4p a share, with the prospect of more to come. Nichols can still reward patient support.
Questor says: hold
Ticker: NICL:AIM
Share price: £12.95
Update: DCC
This column decided to avoid shares in DCC when it first looked at the FTSE 100 index constituent on the grounds the business structure was complex and the premium valuation unjustified, given how growth relied as much upon acquisitions as it did organic, underlying momentum.