Lindsell Train Investment Trust optimistic on drinks sector recovery – Nick Train, manager of the Lindsell Train Investment Trust, has shared a portfolio update highlighting the impact the coronavirus pandemic has had on the performance of his beverage holdings, but that a recovery may well be underway now as the global economy starts reopening. Of the four related brands in his portfolio, which includes top ten names Heineken and Diageo, as well as Laurent Perrier and AG Barr, the former three posted strong share price gains in April, after a difficult year. Train said the macro backdrop has been encouraging, with falling Covid-19 cases in key markets and accelerating vaccine rollouts.
He added: “As a spirits business (predominantly), Diageo has been in a better position to weather the fallout than a brewer, because it has been able to transition on-trade demand to at home consumption. Nonetheless, there should be a big recovery in Diageo’s revenues too, high margin ones at that, into 2022. This on top of secular trends toward the consumption of premium spirits worldwide.
“The pandemic has been a particularly frustrating disruption to Heineken’s operations. The on-trade revenue exposure of c.40% in normal times has been a drag given lockdowns, but better than expected Q1 results and a brightening outlook for the year indicate that this dynamic is reversing, and the structural strengths of the company could become more of a tailwind. We were particularly encouraged by the Q1 report, which showed that the Heineken brand itself had grown volumes by 12%. Meanwhile, the brands the company characterises as “premium”, which account for c.40% of group revenues, were up by low-teen percentage rates.
“This exposure to premium, led by the globally recognised eponymous premium brand, gives Heineken competitive advantages that should permit secular growth ahead of the industry average and superior financial returns too. Recently we note reports that the upsurge in demand for beer in the UK, after pubs began to reopen, has caused supply problems. Two of Heineken’s premium brands in the UK, Moretti and Amstel, are in short supply. Heineken commented – “demand totally surpassed our most optimistic forecasts, and our breweries are working around the clock.” There are implications in this anecdote for many businesses – not least for consumption of Laurent Perrier’s premium champagnes.
“As to AG Barr, at our recent meeting with management the company indicated that post-COVID it hoped to return to underlying sales growth of high single digits. With £50m of net cash on its balance sheet, or 9% of its current market capitalisation, Barr has good optionality to accelerate growth even more, preferably by successfully marketing its new products in energy drinks and cocktail mixers.”
LTI : Lindsell Train Investment Trust optimistic on drinks sector recovery