Nichols' Returns: Unlocking Hidden Value in the Soft Drinks Giant

As an investor, you might be wondering why Nichols plc (LON:NICL), the diversified soft drinks group, appears to be underperforming despite its strong performance in 2024. The company's share price is trading at a 13.83% discount to its 52-week high, raising questions about its growth prospects and returns. Let's delve into the factors contributing to this perceived underperformance and explore strategic moves Nichols could make to enhance its growth prospects and improve returns.



Understanding Nichols' Performance

Nichols delivered a strong performance in 2024, with revenue and adjusted profit before tax in line with market expectations. The company's Packaged business performed well, with full-year sales up by 3.8%, driven by particularly strong growth in the UK. The International business also performed strongly in the second half, despite a shift to a lower revenue but margin-enhancing concentrate model across several African markets. However, the Out of Home (OoH) revenue reduced by 8.2% following exits from unprofitable accounts.

Factors Contributing to Perceived Underperformance

1. Inflationary pressures: Although inflationary pressures have eased during the year, they have still had an impact on Nichols' operations. The company has had to navigate these pressures, which may have contributed to the perceived underperformance.
2. Market uncertainty: The Board remains mindful of continued uncertainty affecting some of the Group's markets. This uncertainty may have negatively impacted investor sentiment and the company's stock price.
3. Exit from unprofitable accounts: Nichols has exited from unprofitable accounts in the OoH segment, which has led to a reduction in revenue. While this move is strategic and aimed at improving profitability, it may have contributed to the perceived underperformance in the short term.
4. Dividend growth: While Nichols has increased its dividend, the growth rate has been relatively low compared to previous years. The dividend growth rate for 2023 was 1.81%, which is significantly lower than the 19.91% growth rate in 2022. This slower dividend growth may have contributed to the perception of underperformance.
5. Analyst expectations: The consensus revenue and Adjusted PBT for FY24 were £172.7m and £30.1m, respectively. While Nichols expects to report in line with these expectations, any deviation or slower growth compared to these estimates could contribute to the perception of underperformance.

Strategic Moves to Enhance Growth Prospects and Improve Returns

1. Investment in product range extension and international markets: Nichols has stated that it will continue to invest in extending its product range and developing its international markets. This strategy has been successful in the past, with the Packaged business delivering strong growth in the UK and the International business performing well in the second half of the year. By continuing to invest in these areas, Nichols can tap into new markets and increase its customer base, driving growth and improving returns.
2. Focus on high-margin products: Nichols' strategy aims to drive a high-margin, highly cash-generative business. To achieve this, the company should focus on developing and promoting its high-margin products, such as Vimto, Levi Roots, and other premium brands. By increasing the proportion of high-margin products in its portfolio, Nichols can improve its overall profit margins and enhance returns for shareholders.
3. Expansion into new markets: Nichols has a strong presence in the UK, Middle East, and Africa. To further enhance its growth prospects, the company could consider expanding into new markets, such as Asia or Latin America. This expansion could be achieved through strategic partnerships, acquisitions, or organic growth. By entering new markets, Nichols can tap into new revenue streams and increase its overall market share.
4. Diversification of revenue streams: Nichols' revenue is primarily generated from its Packaged and Out of Home businesses. To reduce risk and improve overall returns, the company could consider diversifying its revenue streams by entering new business segments or industries. For example, Nichols could explore opportunities in the food or beverage manufacturing sectors, or even consider entering the alcoholic beverages market through strategic partnerships or acquisitions.
5. Improving operational efficiency: Nichols has made progress in improving its gross margins and cash generation. To further enhance its returns, the company could focus on improving its operational efficiency by streamlining its supply chain, reducing costs, and optimizing its production processes. By doing so, Nichols can improve its profit margins and generate additional cash flow, which can be reinvested into the business or distributed to shareholders.
6. Strengthening the balance sheet: Nichols has a strong balance sheet, with a debt-to-equity ratio of 0% and cash and short-term investments of £70.3 million. To further enhance its financial flexibility and improve returns, the company could consider strengthening its balance sheet by reducing its debt levels, increasing its cash holdings, or improving its working capital management.

By implementing these strategic moves, Nichols can enhance its growth prospects and improve returns for shareholders. However, it is essential for the company to monitor market conditions, adapt its strategies as needed, and maintain a strong focus on its core competencies to ensure long-term success.

In conclusion, Nichols' perceived underperformance may be due to a combination of factors, including inflationary pressures, market uncertainty, strategic moves aimed at improving profitability, and slower dividend growth. To enhance its growth prospects and improve returns, Nichols could focus on investing in product range extension and international markets, expanding into new markets, diversifying revenue streams, improving operational efficiency, and strengthening its balance sheet. By doing so, Nichols can unlock its hidden value and deliver sustainable shareholder returns.