Nichols's cup runneth over

Vimto-maker Nichols issued a bubbly update in which it said 2011 figures will be ahead of market expectations.

The group enjoyed a strong 2011 in which its brands had outperformed the soft drinks market in the UK.

Sales for 2011 rose 18% on the previous year and exceeded the board's own expectations.

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On the downside, the company warned that gross margins remain under pressure in the UK business, due to a combination of raw material cost inflation and the exceptionally high level of promotional activity in 2011. The company has, however, maintained its operating profit margin by boosting productivity and keeping tight control of costs.

The group's balance sheet remains strong, with underlying cash generation also ahead of internal expectations.

In January 2012, the company is launching a new range of Weight Watchers branded, low calorie soft drinks into the UK and the Republic of Ireland, which it hopes will add a few pounds to its bottom line.

"Our category expertise, combined with the well established, global, Weight Watchers brand provides further growth opportunities for the group in 2012 and beyond, as well as meeting the increasingly important health and well-being needs of consumers," said company chairman, john Nichols.

The share price rose 49p to 586.5p following the announcement.

Broker Panmure Gordon responded to the upbeat statement by upgrading its fiscal 2012 (FY 2012E) profit before tax forecast by 6% to £19.2m. Current market consensus is for the company to make profit before tax of £17.9m in 2012, although that figure will almost certainly ratchet higher after the latest announcement.

Given that 2012 has barely started, Panmure Gordon is not going overboard with its earnings upgrade, though it notes that the launch of the Weight Watchers soft drinks and "continuing strong moment in its international markets" offers plenty of upside potential to the forecast.

As for the year just finished, Panmure Gordon is now predicting profit before tax of £17.4m, up from its previous forecast of £17.1m. The market consensus figure is £16.8m.

Panmure Gordon rates the shares a "buy", as does Collins Stewart.

"Despite geo-political turmoil in the Middle East and the consumer backdrop in the UK, the performance of the group improved in H2 [second half of 2011] such that sales grew by 23% vs. 14.4% in H1," Collins Stewart analyst Wayne Brown notes.

"The main driver of this growth was international where sales grew 26% in the year with growth in Africa of 28% and 24% in the Middle East," Brown observes.

"Sales grew 15% in the UK despite the consumer backdrop with its new licensing agreements accounting for a 1/3 of this growth and its core Vimto brand growing by 10%," Brown continued.

"This is an especially encouraging update as the group has yet to benefit from the Coca-Cola relationships it has signed in North Africa (ECCB and Castel) and the new licensing agreement of the Weight Watchers brand in the UK," Brown said.

The analyst expects to see the benefits of these initiatives trickling through in the first quarter of 2012, and is especially enthused by the Weight Watchers line of drinks, which is set to be sold in over 900 Tesco outlets.

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