Sunday share tips: Fevertree Drinks, Conviviality, Merchants Trust
Fevertree Drinks shares are now one to 'avoid' said the Sunday Times' Inside the City column, having increased almost 2000% from its flotation four years ago at 134p. Co-founder Charles Rolls sold a 2.6% stake last week, which saw the share price drop 5% to 2,807p. The company therefore has £3.2bn market cap, but turned over £170.2m in 2017 and generated £56.4m in profit.
Fevertree's premium drinks mixers brand is now sponsor of the Queen's Club tennis tournament, having been started up in 2005 and since winning a host of distribution deals as it rode on the back of the upsurge in popularity of gin, craft and micro distilleries and all, which saw sales bubble up 27% last year. But the company is facing greater competition from Schweppes, which is pouring money into a relaunch of its brand of mixers in the UK, meaning Fever-Tree cannot bank on the sort of growth that has seen it grab a 39% market share of the mixers category by value, up from 10% two years ago. A push into the US via tie-ups with spirits companies and a directdistribution deal "should give it a decent foothold in another market where premium spirits are in the ascendency" but a p/e ratio of 58 times forecast earnings from 2020 "is detached from reality".
Shares in Conviviality were under investigation for Questor in the Sunday Telegraph, which tipped the stock earlier in the month and has seen the shares lose around two thirds of their value since and could be more, with management of the Bargain Booze owner admitting the company could go to the wall. After accounting mistakes emerged and the company scrapped its dividend, directors last week unveiled a £129m fundraising in a placing and open offer to enable it to pay a £30m tax bill, pay a £30m loan facility, pay some other overdue payments in order to return its borrowing terms to normal, and provide “working capital headroom”. The group admitted that if it was unable to raise the funds "it is unlikely to be able to trade on a going concern basis”.
Questor said without knowledge of what price institutions will pay in the new share placing, or whether the fundraising will even be completed "it’s difficult to predict the degree of dilution or the likely share price when trading resumes". The dilution for existing shareholders will be determined by the price negotiated and therefore how many new shares are issued. The issue shows that "diversification is absolutely vital", investors should have a portfolio of at least 10 stocks.
Merchants Trust shares are a buy for income seekers, said Midas in the Mail on Sunday. The investment company backs large and small UK-listed businesses with growth potential and aims to pay a generous dividend, with the current yield topic 5% and a 35-year record of rising dividends. Fund manager Simon Gergel has stakes in 45 London-quoted stocks, all of which pay dividends and are expected to deliver share price gains. likes to be in contact with his investment, offering advice at times as he sees the trust as an owner of the companies and therefore entitled to chip in when not happy with how the job is being done.
Merchant's investments range from larger stocks including WPP, British Land, Barclays, all three of which have seen their shares fall in the last year or so, along with BP, GSK and HSBC. Gergel believes the market has underestimated prospects for some of these unloved companies, seeing WPP's business models as able to cope with the influx of mobile advertising and Barclays as recovering.
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