More on Allied Domecq
Allied Domecq
Allied Domecq’s profit growth, in 2004 was driven largely by volume growth in core spirits brands. The company produces drinks including Beefeater gin, Cockburn’s port, Malibu, and Perrier-Jouet champagne, as well as operating Baskin-Robbins and Dunkin’ Donuts.
The benefits of the volue growth were somewhat offset by deterioration of the sales mix with the proportion of premixed drinks increasing. As this has been driving the volume growth we do not view it as a problem. Almost all brands have increased both volume and turnover with only one deteriorating seriously (Tia Maria, volumes -11%, turnover net of excise duties -13%). Excluding premium wines (discussed below) wines and spirits profits were £34m higher.
Despite the company’s stated intention of focusing on premium wines (which Allied Domecq defines as those costing £5+ a bottle) premium volumes were stagnant while value brand volumes were up 5%, however premium wine prices improved and net turnover grew 7% compared with 3% from cheaper “value” brands and profits from premium wines were £11m (+13%).
The Quick Service Restaurants business had an extremely good year with trading profit up £15m (+21%) driven by increased distribution at both Baskin-Robbins (+7%) and Dunkin’ Donuts (+6%) and very strong same store sales growth from the latter of 6.9%.
Britannia Soft Drinks is of little importance with the company’s share of its total profits of £23m (+£3m) less than the increase in in wines and spirits profits. An IPO is planned in by 2008.
The moderate rating of a 13× prospective PE and a 3.4% yield (well covered at 2.3×) is supported by strong cash generation with a free cash flow of £407m (102% of post tax profit).
The core spirit brands are clearly the key driver and the strong performance across brands suggests that growth is robust. The shift to premium branded wines appears to be working but the company has been a little lucky this year, and we do not think that the high growth in the food businesses is likely to be maintained at these levels for long either. We therefore expect growth to be strong but medium term growth to weaken than the current high level.
Random picks: AWG | Associated British Ports | BT | Bovis | Bradford & Bingley | GKN | Intercontinental Hotels | Minerva | Next | Taylor Woodrow