Fever-Tree shares up 12% despite 30% profit slide

Half-year profits at Fever-Tree slid by 30% to £17.6 million from £25.3 million in the six months to 30th June. Yet shares in the tonic maker jumped 12% on Tuesday, as the drinks producer maintained its full-year earnings guidance and management were upbeat on current trading.

First-half revenues at the upmarket soft drinks producer rose 14% to £160.9 million from £141.8 million in the same period in 2021, boosted by increased demand, particularly in its European and US markets.

Fever-Tree hit by US glass shortage

However, profits fell by nearly a third and gross margins declined by 670 basis points due to logistics costs and inflation. Glass shortages at its East Coast US arm have meant the company has had to export glass from the UK, as the cost of sea freight continues to rise. The firm has been forced to raise its prices but this only partially mitigated the cost.

Fever-Tree increased the interim dividend by 2% to 5.63p as a sign of confidence. The company expects full-year revenues of £355 million to £365 million and EBITDA (earnings before interest, tax, depreciation and amortisation) of £37.5 million to £45 million. It remains well-funded with £100 million in the bank, following its £50 million special dividend payment to shareholders.

“Fever-Tree has delivered a robust revenue performance in the first half of 2022, with a particularly strong performance in Europe as the on-trade recovered,” chief executive Tim Warrillow told investors. “Demand has been strong in the US and we have continued to increase our availability on shelf, enabling us to deliver a record month in August.

“Alongside driving topline growth, the business remains extremely focused on mitigating the industry-wide cost impacts and whilst we are still highly mindful of the extreme volatility impacting energy-related and logistics costs, we do expect to see a gradual decrease in our exposure over the medium term.”

US growth potential for the tonic maker

However, Warrillow says the “strength of the Fever-Tree brand” is providing “exciting opportunities” to attract new customers and extend into “significant adjacent categories” and that the potential in non-carbonated cocktail mixers in the US and premium soft drinks in the UK is “extremely compelling”.

Management says it is the market leader in the UK, which provides 33% of its revenues and delivered 6% sales growth during the period. In the US market, which accounts for 25% of sales, revenues rose 11% in the half-year but underlying demand is said to be “significantly higher” - with sales held back by the logistics issue. Warrillow says Fever-Tree’s three-year compound annual growth rate at retail in the US is “almost three times the growth rate of the total mixer category.”

Analysts at broker Liberum said that growth potential for the company in overseas markets “continues to be a source of optimism for the stock.” Meanwhile, analysts at JP Morgan Chase have a price target on the shares of 1,100p.

Fever-Tree shares are down 54% over the past year, having lost most of their Covid lockdown gains. However, at 981.5p they could be worth buying for the longer-term, given the potential for international sales growth. Although, inflationary pressures are likely to continue in the short-term.

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