Estimates for future growth at some of the UK’s most disruptive AIM-listed companies are being vastly underestimated, according to top fund managers.
Fever-Tree (FEVR) has been one of the Alternative Investment Market’s most prolific success stories in recent years and smaller companies funds that have backed the stock have enjoyed serious gains on the back of its meteoric rise.
The mixer drinks maker was backed by a large number of institutions at IPO back in November 2014. Floating at 134p, it has since shot the lights out – its share price has rocketed 21 times to £29.50. It means, £1,000 invested at flotation would be worth almost £18,000 today.
Since its maiden preliminary full-year results as a listed entity, revenues have grown almost fivefold, earnings per share have increased 2,442% and dividends per share are up 2,446%. The stock is currently trading on 74 times last year’s earnings – a searingly expensive multiple to many.
Despite those impressive numbers, Abby Glennie, manager of the Standard Life UK Opportunities fund, says she’s been impressed with “how well [management] has executed and controlled the growth”.
As is their wont, sell-side analysts who cover Fevertree have faded estimates for growth over the next few years. If you believed the consensus forecasts, says Dan Nickols, manager of the Morningstar Gold Rated Old Mutual UK Smaller Companies fund, you would be “bonkers” to own the stock.
Market Share Keeps Growing
But Nickols does still hold shares in Fever-Tree – in fact, it’s his largest holding and accounts for 4.67% of his £1.4 billion fund. That’s because he believes “there’s absolutely no way that sales growth can fade” as badly as analysts expect.
“The long and short of it is that we are very different in terms of our thinking as to how the top-line of this company in particular is likely to evolve in the course of the next few years,” says Nickols.
Fever-Tree continues to grow market share in the UK, with its on-trade presence – in pubs and restaurants – having driven its exponential growth thus far. But now “the real turbo-charge effect is coming from the supermarkets”, explains Nickols. The more popular the Fever-Tree’s products become in the supermarkets, the more shelf space will be dedicated to them and, thus, the more that will be sold.
The UK is the firm’s most mature market, suggesting it has the least scope for growth. However, Glennie, who also has 4% of her fund in Fever-Tree, notes that the UK was the region which generated most of the earnings upgrades last year.
“That’s given me a lot of confidence about the longevity of the market opportunity for the company,” she says. Management’s innovation, too, is a help: from rolling out a canned version of its products while ensuring it does not cannibalise demand for the bottles, to branching out into different flavours with lemon and elderflower varieties of its tonic water.
Now the firm is turning to new territory. “Previously Fever-Tree has offered more around tonics and lighter mixers but the dark spirits market is really big,” continues Glennie. “It has now innovated in ginger ale, ginger beer, and a Madagascan cola format, which really suits that market.”
Breaking the US Market
But the big opportunity for the company, according to both managers, is in the US. Fever-Tree has invested heavily in the States over the past year or so, setting up a dedicated office and sales presence in New York.
The firm’s strategy in the US has been the opposite to that it rolled out in the UK, says Glennie; this time it started with retailers and supermarkets and is only now branching out into on-trade outlets.
The opportunities there are vast. First, on the retail side, while the likes of Tesco (TSCO), Sainsbury’s (SBRY) and Morrisons (MRW) have hundreds of stores on this side of the Atlantic, retail chains Walmart and Safeway have thousands in the US.
Second, Glennie notes that, while the US has a fairly saturated premium spirit market, “they haven’t seen the same premiumisation in the mixers to go with it”. Nickols adds that, while people may think brands such as Schweppes has the financial muscle to go head-to-head with Fever-Tree, “the evidence seems to be that’s not the case because they are wedded to an inferior product”.
But such strong success, particularly at a time when sterling has weakened against other major currencies, could see Fever-Tree become a bid target in the future. Nickols says it could be a possibility once the initial growth has eased.
It would surely be the cherry on top for investors who have already enjoyed so much success from the stock. Nickols says: “The investment case is not predicated on that but it does feel logical that it should be the ultimate outcome.”
