AG Barr: Resilient Growth Amid Challenges, but Stock Valuation Remains Moderate

AG Barr, the renowned Scottish soft drinks manufacturer, has demonstrated remarkable resilience in its recent interim results, showcasing its ability to navigate through a myriad of challenges. The company, founded in 1875 by Robert Barr in Falkirk, Scotland, has a rich history spanning nearly 150 years and has become a staple in the UK beverage industry.

The Cumbernauld-headquartered firm reported a 5.2% increase in total sales for the first half of the fiscal year ending January 2025. This growth is particularly impressive considering the numerous obstacles the company has faced, including new sugar content regulations, the COVID-19 pandemic, carbon dioxide shortages, and input cost inflation.

AG Barr's product portfolio, spearheaded by the iconic Irn-Bru – often referred to as "Scotland's other national drink" after whisky – has been bolstered by strategic acquisitions. The company's soft drinks segment, which includes Rubicon (acquired in 2008) and Boost, saw a 7% rise in sales, outpacing the target market's 2% growth. The recently acquired oat milk maker Moma also contributed positively with a 7.7% sales increase.

However, the Funkin pre-mixed cocktail business experienced a decline in sales, reflecting reduced consumer spending on nights out due to inflationary pressures. Despite this setback, AG Barr's diversified portfolio has helped maintain overall growth momentum.

Profit margins have shown improvement, with the underlying operating margin rising to 13%, up from 12.3% in the previous year. While this is still below the pre-Covid peak of 17.1% reached in 2018, analysts project further improvements in the coming years.

The company's financial health remains robust, with a net cash position of £48.2m, including a pension surplus and modest lease liabilities. This strong balance sheet, coupled with consistent free cash flow, has enabled AG Barr to increase its interim dividend by 17%. The company has a history of rewarding shareholders, having paid out approximately 105p per share in dividends over the past decade.

AG Barr's commitment to sustainability is noteworthy, with the company aiming for net-zero emissions by 2040. This environmental focus, along with its unique employee share ownership scheme and community support initiatives, demonstrates the company's dedication to responsible business practices.

Looking ahead, analysts forecast dividends of 16.3p per share for the 2025 financial year and 18.4p for 2026, translating to prospective yields of 2.6% and 2.9% respectively. These projections, combined with the company's track record of adapting to market challenges, suggest potential for continued growth.

However, investors should note that the current stock valuation, at 19 times earnings for 2025, does not present an outright bargain. The 2026 projection of 15 times earnings appears more attractive, considering the company's earnings momentum, margin profile, and solid balance sheet.

It's worth remembering that AG Barr's shares are still trading over 30% below their all-time high reached in summer 2019 when the stock commanded a price-to-earnings ratio of 30. While a return to such lofty valuations seems unlikely in the current interest rate environment, consistent profit and dividend growth could lead to a gradual re-rating of the stock.

In conclusion, AG Barr's resilience, diverse product portfolio, and financial stability make it a company worth watching. However, given the current valuation and market conditions, a cautious "hold" recommendation seems appropriate for investors considering this iconic Scottish brand.

"hold"