Fevertree's US potential trumps valuation concerns, for Berenberg

Fevertree's shares may appear expensive, but Berenberg said the premium mixers market could triple by 2022 and “dramatically” increase the AIM-listed company's earnings.

The drinks company’s expansion into the US market is supported by strong support for premium mixer market penetration due to the increasing popularity of spirits and the increasing prevalence of bottled mixers in both the off-trade and on-trade channels, Berenberg said in a note to clients on Friday, reiterated its ‘buy’ rating for the company's shares and raising its target price to 4,250p from 3,350p.

US spirits consumption expanded at a notable rate for several years, with volumes rising at a 2.6% compound annual growth rate so far this decade and the market’s value has increased at a 4.3% CAGR from 2010 to 2017, according to Euromonitor.

Euromonitor data also shows that the volume of mixers consumed in the US is five times higher than in the UK.

“In our view, Fevertree is making the right moves to extend its lead as the largest US premium mixer player and take share from non-premium drinks,” said Berenberg analysts.

The broker also lauded the appointment of former Belvedere Vodka chief Charles Gibb as chief executive of North American operations, as well as the decision to create products purpose-built for the US market such as a new citrus tonic water.

There was also praise for an exclusive distribution agreement with Southern Glazer, the country’s largest wine and spirits distributor.

“This 'strategic partnership' will allow Fevertree products to be rolled out in national programmes with the distributor’s spirits portfolio, which includes the brands of all major spirits companies. As such, the agreement, which is the first of its kind that Southern Glazer’s has signed with a soft drinks business, could cause momentum in the on-trade channel to build quickly,” said the note.

The broker concluded that, though Fevertree’s stock appears expensive, the company is the biggest player in a market that could triple by 2022 and see “dramatically” increased earnings, and in the short-term foretasting dividend growth of 19% to 12.68p per share for 2018, before rises in excess of 10% each year until at least 2020.