LONDON (ShareCast) - (Sharecast News) - HSBC initiated coverage of Fevertree, Britvic, Nichols and AG Barr on Wednesday as it took a look at the mid-cap soft drinks market.
The bank started Fevertree at 'buy' with a 3,400p price target, while Britvic and Nichols were initiated at 'hold' with 950p and 1,730p price targets, respectively. Irn-Bru maker AG Barr was started at 'reduce' with a 710p target.

HSBC noted that year-to-date, EV/EBITDA valuation multiples of all four companies have expanded considerably, resulting in all but Fevertree trading at peak or near peak multiples.

"With the industry facing some key challenges ahead we believe this phase of 'multiple expansion' leaves downside risk once growth normalises.

"Against this unattractive valuation backdrop we believe Fevertree is emerging as a global brand on its own and remains a compelling growth story. This is our key preference in the sector."

HSBC said Fevertree's brand popularity has expanded rapidly thanks to the drinks' natural contents and "the unique experience that comes with the drink". In addition the potential for expansion is "big", especially in markets such as Spain and Italy which for tonics are larger than the UK, and the US.

As far as Britvic is concerned, the bank highlighted structural challenges. "Britvic is trading at the top end of its historical trading range and we see further share appreciation as unlikely.

"As results from the second leg of the 'business capability' programme will become visible only in the medium term a further re-rating of the stock would depend on management's ability to deliver higher than expected top line and earnings growth, especially in non-carbonates, both in GB and internationally, which we see facing structural challenges."

HSBC said that while Nichols has a well-balanced portfolio of differentiated drinks businesses, with exposure to different customers and channels, positive momentum is already priced in.

For AG Barr, it said the valuation is too high and there is downside risk of multiple contraction despite the company's solid business model and consumer focused strategy.

At 1255 BST, Fevertree shares were down 2.9% at 2,589.88p, Britvic was 0.3% lower at 906.50p, Nichols was 1.9% higher at 1,818.25 and AG Barr was off 2% at 951p.

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