Why shares in Vimto and Slush Puppie maker continue to reward investors after 100 years

Plus, Questor calls time on an engineering specialist

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Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest for the past six decades.
A first-ever capital markets day from soft drinks specialist Nichols shows how this well-run business continues to develop, as management implements distinct strategies for all three parts of the company – packaged drinks for the UK market, packaged drinks for overseas markets and the out of home (OOH) segment, which serves the hospitality industry.
The roll-out of an SAP-based enterprise resourcing planning software supports a business transformation programme that should deliver ongoing productivity gains, to the benefit of margins, even as the company invests in its brand range, which includes Vimto, Slush Puppie and Levi Roots.
The plan is to increase share in the UK market, which represents around half of group sales, accelerate growth in the overseas business, which generates a quarter of revenue (primarily from the Middle East and Africa), and work on costs in the OOH operation. The OOH business is already delivering here, as it ceases to supply unprofitable customers, improves procurement and targets cost efficiencies.
The key question for investors now is to decide whether Nichols can successfully deploy these strategies and in turn meet its medium-term financial goals. Chief executive Andrew Milne and the board are targeting a 30pc uplift in sales, an extra 250 basis points (2.5 percentage points) in profit margin and a 50pc increase in pre-tax income to £45m.
Assuming a 25pc rate of corporation tax and an unchanged share count, this implies an earnings per share figure of more than 90p and thus a forward earnings multiple of barely 14 times. That would look low for a business with an operating margin of 20pc, high returns on capital, a debt-free balance sheet and a record of consistent cash generation.
All of those facets underpin dividend payments. The 6.6pc forward yield for this year may be a little deceptive, as it owes much to the autumn’s 54.8p-a-share special payment, although that welcome sum takes the total banked since our initial analysis to 259.4p a share, with the prospect of more to come. Nichols can still reward patient support.
Questor says: holdTicker: NICL:AIMShare price: £12.95
This column decided to avoid shares in DCC when it first looked at the FTSE 100 index constituent on the grounds the business structure was complex and the premium valuation unjustified, given how growth relied as much upon acquisitions as it did organic, underlying momentum.
The shares have since fallen by more than a fifth while the FTSE 100 has gained more than 10pc, so our caution has been borne out, even allowing for dividend payments. DCC’s valuation has derated to from 22 times forward earnings to 15 times, according to analysts’ consensus estimates, and management has now declared a plan to focus on the energy segment and break up the conglomerate, which also has healthcare and technology operations.
Analysts are busily calculating what a sum-of-the-parts valuation could be for the company, assuming the non-core assets are sold or spun off on a two-year view. As such, it is probably time to take a less cautious view, even if the sharp rally in the shares since last week’s announcement of the strategic review precludes a wholly favourable stance. Time to be less bearish on DCC.
Questor says: holdTicker: DCCShare price: £55.95
Our faith in engineering specialist and consultant Ricardo has not really paid off and, in this column’s view, last month’s strategy update raised as many questions as it answered. As such, we shall move on and swallow a modest book loss, the bulk of which has thankfully been covered by 40.2p a share in dividend payments over the holding period (including the 8.9p payment that arrives on Friday 22 November, for which the shares went ex-dividend on 31 October).
The board of the Sussex-based company is electing to sell its defence operation, currently a major contributor to group profits. The plan then may be to reinvest the cash in acquisitions to bolster its position as a specialist consultant on environmental issues and the global need to transition to more renewable forms of energy.
This makes sense in that Ricardo will become a less capital-intensive and potentially higher growth, higher margin business. But the plan brings a lot of variables, too, including the price received for the defence business and the nature of any acquisitions, the price paid for them and the integration process to maximise value from them.
As such, we would rather sit on the sidelines and take another look once the dust settles. We have reached the end of the road with Ricardo.
Questor says: sellTicker: RCDOShare price: 430p
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