Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
Shares in AG Barr went a bit flat after last week’s interim results but they had just reached a five-year high and the statement did not feature anything that was particularly incrementally positive.
Equally, however, there were no negative surprises either and the results ultimately suggested that the drinks maker has done well to adapt to, and come through, a period that has thrown up new regulations on sugar content, Covid, carbon dioxide shortages, input cost inflation and a lot more besides, and position itself for further growth in the process.
Sales, profits and the dividend were all higher in the first six months of the fiscal year to January 2025 to leave AG Barr on track to set new all-time peaks for revenues and earnings in the next fiscal year, to January 2026, if analysts’ forecasts prove accurate.
The acquisitions of Rio and oat milk maker Moma have both broadened the Cumbernauld-headquartered company’s product portfolio, which is still spearheaded by the iconic Irn-Bru fizzy drink and its three other big brands, namely Rubicon, Boost and Funkin.
First-half sales were up 5.2pc in total. Soft drinks rose 7pc, to suggest that AG Barr is outgrowing its target market, which grew by 2pc in the same period, and Moma grew its sales by 7.7pc, although this business represents less than 5pc of the group.
The one area of softness was Funkin, the pre-mixed cocktail business, where sales fell, as consumers cut back on nights out and late-night drinking thanks to the squeeze on their pockets from inflation.
After last year’s dip in profit margins, shareholders will be pleased to see AG Barr delivering on its target of an improvement this year (at least once the £4.4m of restructuring charges relating to the merger of the Boost brands and a switch from selling directly to using wholesalers in the independent stores channel is excluded).
The underlying operating margin rose to 13pc, compared to 12.3pc across the whole of 2024, and analysts have pencilled in 13.2pc for the year overall. That is still some way below the pre-Covid peak of 17.1pc, reached in 2018, but it should mean that operating profit continues to grow, with the prospect of further momentum in 2026 as cost efficiencies are realised from the integration of Boost and the sales channel switch.
Meanwhile, a solid balance sheet continues to buttress the business and give it time to invest in, and protect, its competition position in the face of multiple challenges. Attention will then switch to the balance sheet.
AG Barr has a net cash pile of £48.2m, including a pension surplus and its modest lease liabilities of £4.3m and little debt. This strong position, plus free cash flow, also helps to support the 17pc increase in the interim dividend which is growing once more.
Analysts’ forecasts for dividends of 16.3p a share in the 2025 financial year and then 18.4p in 2026 equate to prospective yields of 2.6pc and 2.9pc for 2026. Those sums would add to a haul of almost 105p a share in dividends over the past decade, despite everything that has been thrown at the company.
AG Barr may merit further patient support from investors. The shares do not, admittedly, look like an outright bargain on 19 times earnings for 2025, although 15 times for 2026 looks more enticing, if analysts’ profit forecasts prove accurate, given the earnings momentum, margin profile, cash flow and rock-solid balance sheet.
It is also worth bearing in mind that AG Barr’s shares still trade more than 30pc below their all-time high of summer 2019, when the stock traded on 30 times earnings.
That rating will have been influenced by the zero interest policies that prevailed at the time, and the scramble for reliable earnings and cash flow streams that such policies provoked, wittingly or otherwise.
As it turned out, investors, including this column alas, mistook reliability for safety and by paying such a fat price managed to make a “safe” stock a “risky” investment, especially as unexpected events came out of the clouds to question even AG Barr’s reliability credentials.
Former boss Roger White and the board have done much to help the company navigate a particularly difficult time and if Mr Sutherland can build on that foundation and show that AG Barr can still generate consistent profit and dividend growth then the stock could “re-rate”.
That said, arguing for a 30-times multiple feels like a bit of a stretch (at least unless interest rates go back to zero).
Questor says: hold
Ticker: BAG
Share price: 624p
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