Stock Research #6: AG Barr
Date of Research: 8/1/24
8/1/24 Close: £640.00
9/26/25 Close: £679
Total Return: 6.09%
CAGR: 5.21%
A.G. Barr Research Sheet - Confidence 7/10, Buy
Company Description
A.G. BARR p.l.c., together with its subsidiaries, manufactures, distributes, and sells soft drinks and cocktail solutions primarily in the United Kingdom (96%). It operates in three segments: Soft drinks, Cocktail solutions, and Other.
The company provides carbonated and flavored soft drinks, brewed drinks, pre-mixed cocktails, mixers, syrups, various fruit purees, boost drinks, energy stimulation drinks, sport drinks, iced coffee, oat drinks, spring and sparkling water, fruit juices, and other non-alcoholic beverages.
Debt
Healthy balance sheet, net debt of (£48.7m) indicating strong financial stability with more cash and short term investments than total debt
Investment Thesis
A.G. Barr, a prominent UK beverage firm, owns the leading Scottish soda brand, Irn-Bru, which surpasses global giants like Coca-Cola in its home market. Since acquiring Funkin Cocktails in 2015, it has dominated the UK cocktail scene, particularly in the rapidly expanding ready-to-drink (RTD) segment, projected to grow at a 13.3% CAGR through 2030. Despite its smaller scale, A.G. Barr boasts a robust product range and a solid market presence, especially in Scotland. Its ownership of top brands and expansion in the RTD market position it well for significant growth, setting it apart from competitors like Fever Tree, which has a narrower focus on tonic water and alcoholic mixes.
Based on my analysis, A.G. Barr currently represents a fair price for a great company with long term growth potential via their wide range of products and stable core business. Their strong soft drink brands, Irn-Bru, Rubicon, etc. are still growing and they have fast growing segments with their ready-to-drink cocktails,energy drinks, and plant-based milk products. The only concern I have is that this company profiles as a more long-term play with few short-term catalysts in sight.
Main Drivers
Despite a weakening soft drink industry within the UK, A.G. Barr’s sales volumes outperformed, and their main segments grew significantly, demonstrating a strong core business profile.
“AG Barr’s (BAG’s) FY23 results highlighted the strength of the brand portfolio as group volumes (+2.4%) outperformed the UK soft drinks category decline of 2.9%. Key brands IRN-BRU (33% of FY24 revenue) and Rubicon (19% of FY24 revenue) grew 8% and 15%, respectively, as flavor innovation and format mix helped to drive volume growth.”
Energy & Sports drinks are the fastest growing UK soft drink subcategories, worth £2.7b as of January 2024, making up 20% of the total market
AG Barr’s sports and energy drinks segment capitalized on this, increasing revenues by 22% in 2023.
The Ready-to-Drink Cocktail market is growing fast, and is expected to grow 13.3% per year until 2030. Top brands like Coca-Cola are moving into this market, and large companies in the alcohol space such as Anheuser-Busch have made acquisitions for RTD cocktail lines. (Paid $1b Cutwater spirits in 2019 as an example)
Currently ready-to-drink cocktails only make up 10.5% of their total revenues via Funkin Cocktails, but I believe that this can offer a significant future growth opportunity for the firm, with the strong projected growth for the industry as a whole.
Catalysts / Re-Rating Potential
Potential acquisition target
Reports Q2 earnings September 24
Signs of delivering on projected NFY EBITDA growth of 16% in earnings report
Costs
Input costs are slowly declining off of their covid peak, but are still high; for example sugar is 52% above its 10 yr average level, and aluminum is 16% above its 10 yr average level
Even with higher projected input costs, EBITDA margin is expected to meaningfully increase from 14.7% in 2023/2024 to 16.27% in 2024/2025.
Majority of hedgeable commodities secured for 2024/2025
Valuation
A.G. Barr trades slightly below its long term EV/EBITDA level of 10.2x vs. the current 9.66x.
Compared to peers, it trades at a discount (9.66x EV/EBITDA vs. 12.42x for the peer group) of 28% despite having a much wider product range and better than average EBITDA margin (14.7% vs. 12.1% peer group mean)
ESG
Management plans net zero within their own operations by 2035, and net zero throughout their value chain by 2050
Increasing use of recycled content and renewable materials
Positives
Peer (Britvic plc) was acquired at 13.6x EV/EBITDA or a 36% premium to its trading price prior to the acquisition announcement, despite less revenue growth in 2023 (8.4% vs. 26% for A.G. Barr) — A.G. Barr trades at 9.66x 2025 EV/EBITDA illustrating significant upside
Scotland is one of the only countries where Coca-Cola is not on top in terms of soft drink sales, Irn-Bru, an A.G. Barr brand takes the number one spot
With their strong brand positioning and clean balance sheet, with a small market cap under $1b they could be an acquisition target by larger firms
Current CEO was on Britvic’s board of directors from 2016-2023 and has experience with consumer-oriented brands
Like-for-like revenue growth, excluding the impact of the Boost acquisition was still robust at 8% YoY
Negatives
Acquisitions have been a large driver of growth – there’s potential for the company to struggle in finding future targets to acquire as they grow in size
No significant short term catalyst in sight
Upside Risks
“GDP rebounded by 0.6% in the first quarter of 2024. Business surveys, including a composite of PMI and the Lloyds Business Barometer, are consistent with a re-acceleration of growth.”(KPMG)
Bank of England just cut rates from the 16yr high of 5.25% to 5%, and continued quantitative easing is expected by the market
“Markets on Thursday afternoon were pricing in a 78% chance of another cut in November, with consensus expecting a hold in September.”(CNBC)
Downside Risks
Policy risks pertaining to carbon and packaging related taxes or regulations impacting bottom line revenues (Management claims to mitigate this risk by moving to renewable energy and increasing use of recycled materials)
Minimal exposure to healthy drinks, a market expected to grow from $344.36b in 2023 to $400.8b in 2028 per Mordor Intelligence (Only ~10% of their product mix is focused on “healthy drinks”)
Images
Sources
https://www.grandviewresearch.com/industry-analysis/ready-to-drink-cocktails-market
https://kpmg.com/uk/en/home/insights/2018/09/uk-economic-outlook.html
https://www.mordorintelligence.com/industry-reports/global-health-drinks-industry