Sector financial performance:

This company, which primarily produces and markets non-alcoholic beverage such as sparkling waters, juices, energy drinks, and CSD, has been grouped into non-alcoholic beverage sector.

It seems that companies in this sector are experiencing changes in consumers’ taste and the transmissions of those changes across global markets as the total trend of consumers’ preference is shifting to non-carbonated beverage from traditionally dominating sparkling products. Sales volume data indicates that demand for CSD beverage has been declining globally with an annual rate of about 1% and the demand for non-carbonated beverage increased about 4% annually in the past several years. The global decline in demand for CSD is particularly due to large decline in developed market. For example, the decline in CSD beverage in US market led the whole volume in this market go down by 2-4% in 2016/17 while the decline seems to be being offset by picking up of non-carbonated beverage in 2018.  Globally, driven by increasing in developing market in both CSD and non-carbonated categories, the demand has been increased as indicated by 1-2% annual growth in volume. Accompanying with declining demand for traditional sparkling beverage, we have seen the average price has been rising at an about 2-3% rate globally in the past several years and the price growth rate is lower in US market (1-2%) during the same period. The rising average price has resulted from rising unit price and product mix’s shifting to higher price products.

As a result, as described above, of the changes in consumers’ shifting away from carbonated beverage in US market, the declining demand for CSD beverage hurt more the bottling only companies than brand beverage companies in this industry as indicted by these bottlers’ declining growth rate of can/bottle volume and shrinking gross margin according some of typical bottlers.

Due to strong demand and as well the fact that only a few of brands are dominating market, for those brands owners and manufacturers of beverages the gross margin and operating margin have been kept at high level and seemed to be being improved. In the past several years, with favourable product mix shifting to high price products and reducing commodity costs and business shifting to higher margin operating (franchise), the average gross margin of typical companies in this sector reaches almost to 60% and operating margin to 22%.

However, when talking about the bottlers who have no own brands, their gross margins seem to have decreased largely (down by about 600 basis points in gross margin and by 500 basis points in operating margins, according to a typical bottler). Obviously, the increased margin resulted from shifting of product mix as seen from brand companies was not transferred to bottling sector or at least to some of bottlers who were not able to flexibly adjust their business to adapt new changes in demand.

According our analysis, brand companies’ enterprise price/adjusted EBI is around 31 in a range of 29-35 with interest/EBI ratio of 7%.  Bottlers/private label companies’ enterprise price/sales is about 0.7 with gross margin of 34% and EBI/sales ratio of 0.5%.

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Company performance:

It seems that demand for this company’s sparkling water, juices, and energy drinks products has been growing quickly in the past several years as indicated by case volume annual growth rate of more than 30% among those products. The increasing average selling price also proved the strong demand for those products. Sales for CSD drinks have decreased in the same period of time.

For the first six months of fiscal 2019 compared with same period of 2018(ended 20181027)

The sales of this company increased about 10% primarily attributable to the increase of 13% in case volume of sparkling water, juices, and energy drinks and increase of 4% in price offset by decrease in CSD drinks.

For fiscal 2018 compared with 2017(ended 20180428)

The sales of this company increased about 18% primarily attributable to the increase of 20% in case volume of sparkling water, juices, and energy drinks and increase in price offset by decrease in CSD drinks.

The sales of this company increased about 20% in first three months of fiscal 2018 compared with the same period of 2017  primarily attributable to the increase of 38% in case volume of sparkling water, juices, and energy drinks and increase of 2.6% increase in price offset by decrease in CSD drinks.

The sales of this company increased about 17% in fiscal 2017 compared with 2016 primarily attributable to the increase of 42% in case volume of sparkling water, juices, and energy drinks and increase in average selling prices.

The sales of this company increased about 9% in fiscal 2016 compared with 2015 primarily attributable to the increase of 31% in case volume of sparkling water, juices, and energy drinks offset by decrease in CSD drinks.

This company’ gross margin has increased from around 34% of 2014 to around 40% of 2018 primarily due to favourable products mix and lower raw materials costs.  Because the sales increased faster than the SG&A this company’s operating margin increased from about 11% of 2015 to about 20% of 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 29 ($85/share), which we think, is relatively undervalued compared with its peers considering the benefits to its sales and margin from the its shifting to more favourable products mix may still be continuing.