A Look At 2 Small-Cap Stocks In AIM Space: Abcam PLC And Fevertree Drinks PLC

  • May 21, 2019 BST
  • Team Kalkine
A Look At 2 Small-Cap Stocks In AIM Space: Abcam PLC And Fevertree Drinks PLC

Abcam

Abcam PLC (ABC) is a Cambridge, United Kingdom-based global life sciences company. The company helps in advancing the understanding of biology and causes of disease by providing the research and clinical communities with highly validated antibodies and other binders and assays. The group serves researchers in more than 140 countries with the help of over 1,100 people spread across eleven locations. Alan Hirzel is the Chief Executive Officer of the group.

Key Financial Highlights (H1 FY 2019, in £m)

In the first half of 2019, revenue rose by 10.8% to £124.7m, while it grew by 10% on a constant currency basis. While Catalogue revenue, which accounted for around 94% of total revenue, rose by 10.5% on a constant currency basis to £117m, Custom Products & Licencing (CP&L) grew by 2.3% on a constant currency basis to £7.7m, lower than anticipated. While gross profit increased to £87.6m from £78.5m a year ago, gross margins were modestly ahead of the last year at 70.2%. Reported EBITDA grew to £40.3m and adjusted EBITDA increased by 4% to £44.4m, giving an adjusted EBITDA margin of 35.6%. The margin dipped from 38% reported in H1 2018 due to an increase in the investment to support the long-term growth of the business. While adjusted operating profit was £40.8m, reported operating profit was £33.4m. Giving an adjusted profit before tax margin of 33.0%, adjusted profit before tax was £41.1m, while profit before tax on a reported basis was £33.7m. Adjusted diluted EPS increased by 5.2% to 16.3 pence per share, while reported diluted EPS was 13.4 pence per share (H1 2018: 15.7 pence).

Share Price Commentary

Daily Chart as at May-21-19, before the market closed (Source: Thomson Reuters) 

On 21st May 2019, at the time of writing (before the market closed, GMT 02:10 pm), ABC shares were trading at GBX 1,400, down by 0.49 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,643.80/GBX 1,006.00. On the fundamental front, the company was trading at a trailing twelve months P/E multiple of 43.6x. The company’s stock beta was 0.83, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was £2.89 billion, with a dividend yield of 0.86%.

Conclusion

The fundamentals of the group’s business remain strong, and it has a strong balance sheet which has underpinned its growth. The company, through investment and acquisition, is seeking expansion into new markets, geographic regions and technologies and applications to drive low double-digit growth trajectory with attractive margins. However, lower-than-expected guidance for the full year is not justified by increasing fixed costs in the business. While higher investments have led to downward expectations for an annual adjusted cash profit margins from 36% to 35%, yearly revenue growth is forecasted to be in line with the first half only. This indicates that the increase in sales is currently falling slightly short of management’s expectations, which has put pressure on the stock lately. The continued softness in Japan is impacting top-line numbers, and the company is facing a threat from increased competition as well.

Fevertree Drinks

Fevertree Drinks PLC (FEVR) is a United Kingdom-based developer and supplier of premium mixer drinks for alcoholic spirits. With distribution to over 70 countries internationally, it is the world's leading supplier of its product. Tim Warrillow is the Chief Executive Officer of the group.

Key Financial Highlights (FY 2018, in £m)

Helped by growth across flavours, formats, regions and channels, revenue increased by 40% from £170.2m in 2017 to £237.4m, underpinned by strong margins. While gross profit increased to £122.96m, due to the implementation of the Soft Drinks Industry Levy in the UK, gross margin decreased to 51.8% (2017: 53.5%). Despite an increase in depreciation and an increase in the share-based payment charges, operating profit increased by 34% to £75.4m (2017: £56.4m). While adjusted EBITDA grew by 34% to £78.6m, adjusted EBITDA margin reduced to 33.1% (2017: 34.5%). This translated into a growth of 36% in profit after tax for the year to £61.8m. Normalised earnings per share for 2018 were 53.40 pence per share, representing an increase of 33.4%, while the diluted earnings per share for the year are 53.19 pence (2017: 39.15 pence). Net cash at the end of the period rose by 64% to £83.6m. Bringing the total dividend for the year to 14.50 pence per share, a final dividend of 10.28 pence per share was recommended to the shareholders.

Share Price Commentary

Daily Chart as at May-21-19, before the market closed (Source: Thomson Reuters)

 

On 21st May 2019, at the time of writing (before the market closed, GMT 02:15 pm), FEVR shares were trading at GBX 2,893, up by 0.31 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 4,120.00/GBX 2,106.00. On the fundamental front, the company was trading at a trailing twelve months P/E multiple of 51.5x, against the industry median of 20.5x. The company’s stock beta was 1.79, reflecting higher volatility as compared to the benchmark index. Total outstanding market capitalisation was £3.35 billion, with a dividend yield of 0.50%.

Conclusion

The group may experience a decline in its market share or downward pressure on prices as it continues to face competition from other beverage companies in the mixer category. Reduced consumer confidence and spending due to an economic downturn in the company’s key geographic markets could affect demand for its products and impact its ability to maintain prices. It also faces potential risk from the supply chain disruption, and introduction of trade tariffs after the UK exits from the European Union. However, despite increasing competition, the company is able to differentiate itself from the mass-market competition by highest quality ingredients in its products, and hence maintain premium status for its products. Further, revenue is diversified across geographies, channels and customers, which enables it to mitigate any potential headwind arising from a particular region. The group has, to date, achieved strong cash generation, which is underpinned by the company’s model, which requires minimal capital expenditure.

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