Thursday, January 6, 2011

Nichols Update Sees Vimto Sales Expanding

Nichols plc gave a strong trading update today. It is a stock that we featured with an article in the following link found here    This update will be based on that write-up so please refer to it.

Nichols is an attractive stock to buy principally because they are ;extracting the full value from the Vimto brand, achieving margin expansion within distribution, and finally Vimto overseas sales will be strong over the next ten years because Ramadan will take place in the summer in that period.


Nichols Trading Statement

Today's trading statement can be found here and brokers have been keen to upgrade them recently. Nichols reported

Full year 2010 revenues are once again well ahead of our internal plans, with operating margins that will be in line with plan.  The Group's balance sheet has been strengthened and underlying cash generation will also be ahead of expectations.

In overall terms we expect the Group's profitability for the year to 31 December 2010 to be significantly ahead of last year and ahead of current market expectations.
I've run some rudimentary numbers based on the interim results and the previous article in Earnings View, to which I linked into in the first paragraph. Given 16% sales growth (which their broker predicts) it looks like 2010  revenues will come in at 83.9m as against the previous consensus of 80.4m

The stock currently trades at 480p with a market cap of 176m. Assuming margins are the same as in H2 of 2009 this will give operating profits of 15.3m and net profits of 10.7m and this gives full year EPS of 10.7m/36.52m=29.2p This would put them on a PE ratio of 480/29.2=16.4

In terms of free cash flow, I would assume ramped up capex for next few years of 600k and cash flow conversion of 100% and this would give 10.1 or a free cash flow yield of 10.1/176=5.7%

Assuming 5% revenue growth for 2011 (possibly conservative) and similar metrics gives 2011 EPS=30.9 and free cash flow of 10.66m

Nichols a Stock to Buy?

For this kind of business I would like to pay around 5.5% forward free cash flow yield. There is upside potential from Cherry Vimto and international sales, but also downside potential from competition and rising food costs. Nevertheless, I think 10.66/.055=193m or around 528p is a fair price for this stock.