Wednesday, November 24, 2010

Nichols Plc. Vimto is a Good Play on Emerging Market Growth

I decided to take a look at a UK stock Nichols Plc. What makes Nichols interesting as an equity research stock is that they own Vimto, which is a very popular fruit soft drink during Ramadan. Furthermore, for the next ten years Ramadan is set to take place in summer and, this should lead to strong sales growth for Vimto. This year’s Ramadan began on August 10 and, roughly speaking, the date in next year is usually 10/11 days before the previous years.  Around 22% of soft drink sales (mainly Vimto) are international and this is mainly to the middle east.

All of the numbers below, are calculated using a 164m market cap and a share price of 450p


The story doesn’t just lie with Vimto internationally. In the UK, Nichols have expanded their product range to things like Cherry Vimto and the Diet range.

I’ll run some numbers




2005
2006
2007
2008
2009
Turnover

51521
52296
55276
56221
72378
Gross Profit
33101
27532
27955
28701
36180
Gross Margin
64.25%
52.65%
50.57%
51.05%
49.99%
Operating Profit
7219
7385
8742
9804
12501
OP Margin
14.01%
14.12%
15.82%
17.44%
17.27%


So what we see here is an impressive growth strategy, particularly over the last year. Margins were trimmed slightly in 2009 but this was mainly due to promotional activity to add scale. Their trading history hasn't always been so rosy. In 2005 they bough the Panda and Sunkist brands, only to have a 5.7m goodwill impairment charge on Panda in 2008. Similarly, they have spent time refocusing soft drinks towards stills and sugar free options, as carbonated fizzy drinks are hardly the beverage de jour.

Looking at the divisional break up of sales


Soft Drinks

     2005
     2006
     2007
      2008
     2009

Rev

39.3
39.9
41.7
43.5
55.1

Op Profit

7.1
7.4
8.3
9.6
11.5

Margin

18.07%
18.55%
19.90%
22.07%
20.87%
Beverage Systems







Rev

24.1
12.4
13.6
12.7
17.3

Op Profit

0.7
0.3
0.4
0.9
1.7

Margin

2.90%
2.42%
2.94%
7.09%
9.83%








International Soft







Revenue


6.8
8.9
8.9
12

% of Soft Drinks


17.04%
21.34%
20.46%
21.78%


You can see that international sales are rising as a share of total soft drink sales. There were some manufacturing difficulties in Yemen which held back the 2008 numbers.Growth has been good and they are turning around the beverage systems division having changed strategy. They are now number three in beverage dispense in the UK.  However, what is happening with the balance sheet?
                                          2005      2006         2007       2008        2009

Inventory3972  2169250927582694
Inventory/Sales0.080.040.050.050.04
Debtor1459212364131771357514730
Debtor Days10386878874
Creditors17532896488281013711789
Creditor Days347132118134119


Everything looks fine here. Debtor days are reducing and creditor days are not reducing. Their cash generative nature is demonstrated when you look at cash flow
                                         2005        2006        2007       2008        2009

Op Cash Flow970458417178941414102
conversion134.42%79.09%82.11%96.02%112.81%
Capex1697837336220202
Tax20041654180025953076
Interest575-84-291-288-45
FCF542834345333688710869
FCF/Turnover10.54%6.57%9.65%12.25%15.02%
FCFYield3.31%2.09%3.25%4.20%6.63%


This analysis is based on a share price of 450p and a market cap of 164m. So, it looks like they are incrementally adding free cash flow margin as turnover and profitability goes up. I'm very impressed with the trend in cash flow conversion. This suggests that as long as they can continue to grow revenues, they can increase free cash flow.

Consensus forecasts are for revenues of 80.4 and 83.75m  revenues for 2010 and 2011 respectively.

The main downside risks are that they fail to continue to execute in the UK, bad weather (which affected 07 and 08) and a change of consumer tastes in the UK. There is also the general macro economic risk of falling UK carbonate and still sales.

The upside risk comes from continued strong growth in the Middle East and Africa. Furthermore, a potential purchaser spotting their positioning in the middle east and buying them out. Indeed, they were approached a couple of years ago. This was possibly AG Barr (Irn Bru etc) before they bought out Rubicon.

I think you could easily see them generating 9.6m in free cash flow in 2011 so a share price of 480p (a 5.5% FCFYield) is not unreasonable. However, at the current price I would probably want a dip first.

Disclaimer: I have no position. All figures are estimates, of which I take no responsibility for and, this doesn't constitute investment advice.