Fever-Tree must hope changing trends do not cap growth

Men wearing hats in pubs. Not old men in flat caps, with whippets. But young men in baggy caps, with whiskers. Lombard has noticed increasing outbreaks of this affectation, and its accompanying libation: a 56-botanical infused “craft” gin, served in a goldfish bowl with Fever-Tree tonic. Always Fever-Tree tonic. And there is apparently a justification for the latter, if not the former. According to the level-headed analysts of Jefferies, Fever-Tree “is a leveraged play on premiumisation trends in spirits, in a sub-category where there is a disconnect between premium spirits and mixers.” Which sounds just like pretentious pish (pischhh?) uttered by those level-hatted beardos in boozers.

But it is undeniably true. In the three years after it floated in 2014, Fever-Tree’s annual pre-tax profit rose 2,150 per cent, to £56m, as its revenue grew 390 per cent, to £170m. On Thursday, it said revenue had grown by another 39 per cent in 2018, to £236m, putting full-year profit “comfortably ahead” of expectations. No wonder its shares fizzed up 15 per cent to settle at £29.79 — 22 times their float price.

Even analysts of the more pointy-headed variety saw no risk of profit falling flat. Morgan Stanley’s calculated that operating leverage on overheads should lift the operating margin to a higher than forecast 32.1 per cent.

However, as some realised there had been no trading update in November because profit was only “comfortably” — not “materially” — ahead, attention turned to the addressable market of premium gin drinkers . . . with or without material on their heads.

Numis analysts were confident that Fever-Tree could exploit a “substantial growth opportunity in the US”, having brought its American operation in house and signed a deal with the continent’s largest wines and spirits distributor, Southern Glazer’s.

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But that still leaves Fever-Tree with three challenges.

First, it will have to adapt its product range to US tastes if it is to match its UK growth rates. Americans drink less gin than the British — and it will be harder to disrupt the US market with Fever-Tree cola and ginger ale. Co-promotions, like a recent tie-up with Patrón tequila, may help — but how many people drink tequila and tonic?

Second, it will have to fend off stronger competition in the UK. Jefferies analysts still think Fever-Tree is “a unique asset”. Not any more. Other artisan tonic makers have noticed the 30 per cent margin to be had from selling sugar water to indoor hat wearers. As one FT reader wrote on Thursday: “My Fever-Tree pioneering hip relatives . . . moved on to whatever the next cool mixer brand is.”

Third, Fever-Tree will need to diversify further when the fad for flowery gin passes. At London’s most traditional gin bar — where the hats are on stands and the only mixer is vermouth — the legendary manager has a term for the botanicals trend: “Bollocks!” How long before the same is said of Fever-Tree’s valuation: 38 times 2020 earnings?

St James’s: well placed

Not even the well-advised clients of St James’s Place are immune to volatile share prices. On Thursday, the FTSE 100 wealth manager reported that fund inflows in the last quarter of 2018 were 9 per cent lower than the year before, because of “particularly difficult market conditions”. Chief executive Andrew Croft was forced to admit investment levels had been depressed by “external” factors.

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Pension inflows seemed particularly affected, down 2 per cent in the period, year on year, compared with the 31 per cent growth recorded in the first nine months of the year. “First signs of pension flows slowdown visible,” said UBS’s analysts. “Warrants caution.” With investment returns also turning negative, total funds under management fell £5bn, or 5 per cent.

However, St James’s Place own share price duly rose 2 per cent. Why? Because there is something else to which its clients are not immune: the persuasions of its 3,954 advisers. In fact, while there is undoubtedly some correlation between short-term fund flows and volatility, there is a more persistent correlation between long-term fund flows and adviser numbers.

And St James’s Place full-year numbers showed this was as strong as ever. Over the course of 2018, the number of qualified advisers working across its partner businesses was up 8 per cent, thanks to continued recruitment and its own Academy training programme. At the same time, its gross fund inflows in the full year were up 8 per cent to £15.7bn, and its net inflows by 8 per cent to £10.3bn.

Panmure Gordon analysts knew this was no coincidence: “Adviser numbers are important as they are the lifeblood of what is the impressive new business machine”. Once the new business is in, it is kept, too: the retention rate of client funds is 96 per cent.

St James’s Place shareholders therefore have no need of stock market indicators, only the latest numbers on adviser recruitment. Given group training costs are currently rising by 15 per cent a year, this is one outlook that is neither uncertain nor volatile

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