Share Watch: Britvic, Dewhurst, Future, ITE and Treatt

  • Calories count for Britvic
  • Dewhurst is consistently profitable
  • ITE has been hit by headwinds

Each month Richard Beddard trawls through annual corporate results for his Watchlist and the Share Sleuth portfolio of companies that satisfy key valuation metrics such as earnings yield and return on capital - and profiles the most interesting candidates.


Britvic and other soft drinks manufacturers may be following tobacco, gambling and alcohol firms into the sin stock category. Our tastes are switching to healthier drinks, and the government is introducing the soft drinks industry levy, also known as the sugar tax, to encourage the trend.

Soft drinks manufacturers and importers will have to pay the levy from 2018 onwards unless they make their drinks less sugary.

Since Britvic earns 63 per cent of its total revenue in the UK, the threat from the sugar tax is considerable.

It comes as the prices of imported ingredients are increasing and competition is driving soft drink prices down, squeezing profit margins and limiting the company's growth expectations.

Revised incentive plans for senior managers target growth of just 3-8 per cent.

Despite these challenges, Britvic has a fantastically profitable track record. Return on capital in the year to 2 October 2016 was 26 per cent.

It's hard to imagine life without the company's most famous brands, which include R Whites, Robinsons, Tango, J2O and Drench. Having formulated drinks with no added sugar, 68 per cent of Britvic's UK portfolio is exempt from the proposed sugar tax.

In each of the three years since Simon Litherland became chief executive, profits have beaten the previous record, aided somewhat in 2016 by the acquisition of a leading Brazilian squash manufacturer.

Debt has increased though, due to capital investment in the UK, and the share price has fallen. A price of 586p values the enterprise at £2.2 billion, about 15 times adjusted profit.

The earnings yield is 7 per cent. That may not seem cheap, but it is by Britvic's standards.


Events conspired to knock the gloss off Dewhurst's results in 2016. The company, which makes pushbuttons as well as lift and ATM components, earned its highest annual revenue back in 2012.

In the year to September 2016, demand for ATM keypads and fascias fell sharply at the beginning of the year; although orders from Dewhurst's only significant ATM customer (believed to be NCR) recovered, sales were still 7 per cent lower over the full year.

Sales also fell at subsidiary Thames Valley Controls, which makes lift controllers.

But for a £400,000 helping hand from the weak pound, which inflated the prices of rival products imported into the UK and made Dewhurst's products more competitive abroad, profit would have fallen by more than the 1 per cent reduction Dewhurst actually suffered, possibly by as much as 10 per cent.

Dewhurst depends on major infrastructure development and refurbishment projects. In 2016 it supplied lift components for projects in market hotspots such as Dubai, London and Toronto, and it manufactured pushbuttons for Virgin East Coast trains.

Construction and refurbishment inevitably waxes and wanes with economic prosperity, while pessimism about global growth may be weighing on Dewhurst's results. So too may technological change, as lifts and ATMs increasingly employ touchscreen interfaces in place of pushbuttons.

Dewhurst produces touchscreen operating panels, but it buys in the touchscreens and therefore makes less profit from them than it does with its pushbuttons. It has broadened its product range to include all manner of lift and escalator components.

Look beyond the exceptional year in 2012 and Dewhurst remains a highly profitable company that is growing, albeit sometimes unsteadily.

Profitability is lower than it was last decade, but an average return on capital of 18 per cent so far this decade is still impressive. Perhaps, like the football team that grinds out 1-0 victories even when it's off its game, Dewhurst is still a champion.

A share price of 632p values the enterprise at £48 million, about 11 times adjusted profit in 2016. The earnings yield is 9 per cent.


The year to September 2016 could herald a long-awaited recovery for magazine publisher Future.

The company has been reborn as a content provider supplying technology and gaming enthusiasts through events and websites, as well as magazines. Furthermore, it now generates revenue by selling products in addition to advertising and subscriptions.

Revenue, which was flat in 2016, has contracted by almost three quarters since Future's dotcom heyday.

The best that can be said about profits in recent years is that Future may have made some, depending on how charitable you want to be about the costs it has chosen to ignore in its headline figures.

In some respects 2016 was no different. Redundancy and restructuring costs combined with an accounting adjustment to wipe out profit and deliver a large loss.

Treat these costs as exceptional, and profit rose sharply. Cashflow, probably a more reliable indicator, was up too, and the company had more cash than borrowings at the year end.

Future's strategy to develop more diverse revenue streams is affecting both its shape and its performance.

The online and events side of the business, reorganised into two divisions, has grown, generating 41 per cent of revenue in 2016 compared with just over 35 per cent previously, while the print aspect of the magazine business is 'in managed decline'.

Future's shape changed again in October 2016, when it acquired Imagine, the publisher of 19 rival magazines and about 300 'bookazines'. Future says Imagine is a world leader in the bookazine category, which repackages content into themed publications.

Because they are cheap to produce and have higher cover prices as well as a longer shelf-life, bookazines could be another significant revenue stream for Future.

A share price of 14p values the enterprise at £83 million or about 39 times adjusted profit. The earnings yield is just 3 per cent.

Although Future's recovery is tentative, and its prosperity depends on somewhat new and untested revenue streams, traders believe its future is bright.


International trade show organiser ITE is midway through a critical phase. Revenues and profits from its activities in Russia and the country's neighbours in central Asia have tumbled.

Meanwhile, acquisitions in other developing countries, including India, China, Turkey and South Africa, have mired the company in debt.

Technically, ITE made a loss in the year to September 2016, after the company wrote off almost half the goodwill in its Indian business, much of it acquired as recently as 2015.

ITE says the business is performing well, but delays in the construction of a new exhibition venue mean it will not grow as rapidly as expected.

The write-off is an accounting adjustment to historic expenses (the amount paid for acquisitions), so the business did not lose money in 2016.

If we ignore the adjustment, profit fell by 19 per cent, mainly because of the impact of lower oil prices on the economies of Russia and neighbouring countries in central Asia - ITE's main markets - which are dependent on income from oil.

Furthermore, the devaluation of currencies in the region made many of ITE's customers - firms importing into Russia and central Asia - less competitive.

ITE's trade shows remain highly profitable, despite the contraction, because ITE receives payments in advance and can adjust staffing and the amount of space it rents according to need.

Its flexible cost structure has limits though. In its annual report, ITE warns that a significant deterioration in Russia and Turkey in particular could mean it breaches its banking covenants.

In oil-dependent Russia, where ITE still earns 38 per cent of its revenue, business is improving, but in tourism-dependent Turkey, which with Ukraine yielded 14 per cent of revenue in 2016, business is deteriorating because of the countries' unstable internal politics and poor relations with Russia.

This is not a comfortable position for shareholders, or for ITE's chief executive or finance director, both appointed in 2016.

ITE must conserve cash, and it may need to raise money to restore its financial strength. A share price of 158p values the enterprise at 16 times adjusted earnings. The earnings yield is 6 per cent.


Flavouring and aroma supplier Treatt's annual report for the year ending September 2016 reveals another highly profitable year.

In recent years the company has reduced its dependence on the standardised flavours it has traded for more than a century by developing more exotic, potent flavours, sometimes in partnership with its customers in the beverage industry: brewers and soft drinks companies.

In this year's annual report, Treatt says ingredients for tea-flavoured drinks and flavours that improve the taste of artificial sweeteners are high-growth markets.

As Treatt's ingredients have become more popular, revenue has grown, more than doubling between 2007 and 2016. Moreover, the firm has been able to raise the profit margins on its specialised ingredients, so profits have grown even faster than revenue, more than tripling over the same period.

The move up the value chain brings Treatt into competition with its own customers, the big international flavour houses, but Treatt believes it is more nimble than these businesses, and can anticipate trends and bring flavours to market before bigger rivals.

Treatt's progress is impressive. However, profitability and, more significantly, cash flow have been buoyed as the company holds back on investment, mindful that it intends to move into a new, purpose-built headquarters by the end of the decade.

The company estimates it will spend between £21 million and £31 million on the new facility and equipment upgrades.

This spending will temporarily increase debt levels and perhaps reduce profitability. Longer-term, however, with the business in one building instead of six, Treatt should be able to operate more effectively and expand its collaboration with customers.

A share price of 251p values the enterprise at £138 million, about 17 times sustainable earnings. The earnings yield is 6 per cent.

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