Does Britvic Plc Offer Value In An Overvalued Market?

| About: Britvic plc (BTVCY)

Summary

Britvic has a great dividend record and poised for consistent EPS growth.

Shares look cheap at just 15 p/e.

Debt is a worry.

While a confident bull market coupled with economic growth encourage riskier investments in sectors such as biotech and tech, conversely, any market panic (Brexit + lower forecast economic growth) tends to encourage investors to flock to safer, more predictable industries such as consumer staples and pharmaceuticals, after all, people always have to eat and drink!

If we are to look at the current economic climate things are far from certain in the U.K. We are faced with low interest rates, a forced stimulus package from the BoE and the uncertainty of a British exit from the EU. This climate has undoubtedly driven investors to stocks such as Unilever (NYSE:UL), Reckitt Benckiser (OTCPK:RBGLY) and even Nestle (OTCPK:NSRGY) which are seen as safer investments. This means that it has become increasingly difficult to find value in the current market.

For example, Reckitt Benckiser is sporting a p/e ratio of 34, Nestle of 26 and Unilever of 24 meaning that investors are paying more for steady earnings. Whilst I still consider these stocks solid investments, it's hard to see value for money at such valuations.

Having scoured the FTSE100 and FTSE250 to try and find value in the sector I came across Britvic Plc which I feel offers significant value to investors. Britvic Plc is a U.K.-based soft drinks company. The Company offers sparkling sodas, juice drinks, ice tea, squash, syrups, mineral waters, mixers and energy drinks. The Company operates through five segments: GB stills, GB cards, Ireland, France and International. The Company manufactures, markets and sells a range of brands, including Pepsi (NYSE:PEP), 7UP, Lipton Ice Tea and Mountain Dew.

Britvic's shares are down 11% over the past year on a cocktail of worries including the U.K.'s decision to impose a sugar tax and a slow start to the year with lower than expected revenue. But these are all short term pressures and the company can certainly adapt to such legislation.

With a p/e of just 15 and a progressive dividend policy with a 10 year streak of increasing dividends (bar a freeze between 2011-2012) This stock looks appealing, so let's take a closer look.

The dividend

Britvic's dividend payout ratio currently stands at 55% with a dividend cover of 1.8. Whist not excellent, this is a decent ratio meaning that the company has its dividend payments well covered. Given that the company follows a progressive dividend policy I can certainly see room for an increase in the dividend payout ratio in order to continue to increase the dividend in the short term if results disappoint.

The stock also offers a juicy yield of 3.7% - certainly not bad.

Any red flags?

One criticism of Britvic and a potential reason as to the low current valuation is the level of debt it carries. I am slightly concerned at the debt Britvic currently holds with a debt to equity ratio of 2.8 the company appears highly leveraged, especially for its sector, although this ratio has declined over the past 5 years due to an increase in assets and the debt is also well covered by earnings (5.1x). I would still be comfortable buying in at this level buy would certainly like to see a reduction in debt over the coming years.

Also, unlike other stocks mentioned in this article Britvic does lack diversity in its portfolio. I must emphasize that Britvic's brands are restricted to the beverage industry and as such offer less security than diversified conglomerates such as ULVR.

Value

For me, Britvic Plc offers outstanding value in this overpriced sector. With a p/e ratio of only 15 and a history of a continued increase in EPS I feel that this stock is significantly underpriced by the market.

Using a dividend discount model I calculated a fair value of the stock as follows;

Britvic has managed to increase its dividends by an average of 6.61% over the past 5years. With an upward trend in EPS and room in the payout ratio I see no reason why we can't conservatively estimate a yearly dividend growth of 6.6% for the stock going forward based on these factors.

I also factored in a discount rate of 10% accounting for the risk the debt poses and the relative uncertainty of this small cap stock compared to peers.

The equation - Price = Estimated value of next year's dividend (1)/(discount rate - Dividend growth rate) gave me a fair value estimate of: 676.47p per share.

This means that according to my analysis this share appears 10.7% undervalued.

Disclosure: I currently hold no position in BVIC but do intend to initiate a position over the next month if capital allows me to do so.

Disclosure: I am/we are long UL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.