Britvic: Drinks Producer And Pepsi Bottling Company At A 9% FCF Yield (OTCMKTS:BTVCF)

Introduction

Britvic (OTCQX:BTVCF) (OTCQX:BTVCY) is a UK-based company that owns and produces its own drink brands but also has a 20-year agreement (running until 2040) with PepsiCo (PEP) to produce, bottle and market their products in the UK and Ireland (not just Pepsi and Pepsi MAX but this also includes 7Up, Lipton Ice Tea and Rockstar Energy). Mainland investors may recognize the Teisseire brand, which is a well-known producer of syrups.

Britvic has its primary listing in London, where the stock is trading with BVIC as ticker symbol. The average daily volume is approximately 600,000 shares, and with approximately 254M shares outstanding as of the end of FY 2023 (and likely fewer shares outstanding right now as Britvic has an active repurchase program), the market cap is approximately 2B GBP. Given the higher trading volumes, interested investors should trade in Britvic’s shares using the facilities of the London Stock Exchange.

While the reported earnings are disappointing, the underlying results are strong

Looking at the 2023 results, Britvic reported a total revenue of 1.75B GBP, which is an increase of 6.6% compared to the 2022 revenue. That’s a remarkable performance considering the company also reported a 2.2% volume decrease, so the price/volume mix turned out pretty positive. As you can see below, the total gross profit increased by approximately 5% to just under 700M GBP, resulting in an operating profit of 181.5M GBP, which is a 6% decrease compared to the 192.3M GBP in operating profit the company generated in 2022.

This warrants an additional explanation and justification. The reported EBIT included a total charge of approximately 37M GBP, of which 29M GBP were non-cash elements. This includes a 20.5M GBP pension adjustment related to the renegotiation with the Board of Trustees. As per the renewed agreement, the pension scheme is fully funded on a technical provision basis, and it will reach the self-sufficiency status by Q1 2026, after which no cash payments will be required. The image below provides more details on those adjustments.

As the image above shows, the adjustments in FY 2023 were approximately 23.3M GBP higher than in 2022, which more than fully explains the difference on the EBIT-level.

This also means that while the reported net income of 125M GBP was disappointing, the underlying net profit was 32.7M GBP higher, ad almost 157M GBP which is about 3% higher than in FY 2022 despite seeing a 40% increase in finance expenses.

On a per-share basis, the underlying earnings came in at 61 pence (compared to just over 57 pence in the preceding year) which means the stock is currently trading at approximately 13 times the net income.

As a majority of the adjustments are related to on-cash items, I was quite interested in seeing the cash flow statement to check if the free cash flow indeed came in higher than the reported earnings. The cash flow statement below shows a total operating cash flow of 238M GBP, but we should deduct 32M GBP in interest and lease payments from that amount while adding back the 15.5M GBP net investment in working capital elements. This means the adjusted operating cash flow was approximately 221M GBP on an underlying basis.

As you can see above, the total capex was 78M GBP, including the 8.1M investment in intangibles but excluding the 25M GBP acquisition-related cash outflow. This means the underlying free cash flow was 143M GBP. While that’s indeed higher than the reported net profit, it is lower than the adjusted net income for the sole reason Britvic’s growth investments outpace the depreciation and amortization expenses (excluding acquisition-related amortization costs) of 55M GBP.

Britvic spent about 87M GBP on leases and capex. It’s safe to say the sustaining capex was substantially lower (and likely even less than half) than the reported capex.

2024 Guidance: mid-single digit growth can be expected

The growth investments obviously serve a purpose. While Britvic has disclosed some elements that would allow us to calculate the FY 2024 earnings, it did not provide an expected EBITDA or EBIT guidance. I am falling back on the analyst consensus estimate to see an EBITDA of 303M GBP and an EBIT of 236M GBP this year. From that point, we can fill in the blanks with the guidance provided below.

We know the interest expenses will be approximately 35M GBP, resulting in a pre-tax profit of 200M GBP. Applying a 24% tax rate results in a 152M GBP net profit on a reported basis. Divided over 252M shares (the share count was just over 254M Shares at the end of September, but as Britvic continues to buy back its own shares and has earmarked almost 38M for repurchases, I expect the net share count to be lower by the end of this year), that would result in an EPS of 60 pence per share while the underlying earnings will likely be higher than the reported earnings.

The capex will remain at a relatively elevated level of 75-85M GBP which means the total capex + lease payments will likely come in at around 100M GBP and I expect those elements to remain stable in the foreseeable future. This should continue to help boost the EBIT result, as the consensus estimates I referred to above anticipate a 6% CAGR on the EBIT level between now and 2026.

About half of the earnings will go to dividends and Britvic has paid a total dividend of 30.8 pence for FY 2023 which is a nice increase from the 29 pence in the preceding year. And as a reminder, there is no dividend withholding tax on dividends payable by tax-paying companies in the UK.

And Britvic is on the right track. In its Q1 trading update, the company disclosed a 8.1% revenue increase to 444M GBP in the first quarter of the year. More detailed financials will be provided when Britvic publishes its half-year report.

Investment thesis

Based on the 2023 cash flows – which include the growth investments – and an anticipated net share count of 252M shares (this is conservative as I think the odds of seeing a share count below 250 million is pretty realistic) we will likely see a free cash flow of approximately 57 pence per share. Adjusted for approximately 40M GBP in growth expenses, the underlying free cash flow exceeds 72 pence per share.

Which means that trading at just under 800 pence, Britvic is attractively valued at a pro forma underlying free cash flow yield of approximately 9% (and this likely is a conservative estimate). At the end of FY 2023, Britvic had a net debt of 513M GBP (excluding lease liabilities and including interest-bearing deposits) and based on the consensus estimate for the EBITDA this year adjusted for lease amortization (303M GBP – 8M GBP), the pro forma debt ratio is just under 1.8 times EBITDA which is on the lower end of the company’s target of 1.5-2.5 times EBITDA. At an EV/EBITDA of around 8.5, the stock isn’t terribly cheap, but the investments in growth could pay off given the anticipated mid-single digit EBIT growth for the next few years.

I currently have no position in Britvic, but my interest is triggered. The dividend of just over 30 pence per share means I get paid just under 4% while the rest of the free cash flow is reinvested in growth and used for share repurchases.

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