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

Inventory		3972	2169	2509	2758	2694
Inventory/S	ales	0.08	0.04	0.05	0.05	0.04
Debtor		14592	12364	13177	13575	14730
Debtor Days		103	86	87	88	74
Creditors		17532	8964	8828	10137	11789
Creditor Days		347	132	118	134	119

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 Flow		9704	5841	7178	9414	14102
conversion		134.42%	79.09%	82.11%	96.02%	112.81%
Capex		1697	837	336	220	202
Tax		2004	1654	1800	2595	3076
Interest		575	-84	-291	-288	-45
FCF		5428	3434	5333	6887	10869
FCF/Turnover		10.54%	6.57%	9.65%	12.25%	15.02%
FCFYield		3.31%	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.