AG Barr Downgraded by Berenberg on Weak Volume Growth Concerns

Berenberg has downgraded soft drinks manufacturer AG Barr (LSE:BAG) to “Hold” from “Buy,” citing a more uncertain growth outlook following flat like-for-like sales in the first half of its 2027 fiscal year. The investment bank also cut its price target on the stock to 625 pence from 800 pence.

Volume Weakness Clouds Outlook

In a note issued Thursday, Berenberg described AG Barr's interim results from Sept. 30 as "underwhelming," especially given favorable conditions such as strong summer weather and the FIFA World Cup. The brokerage pointed to weaker-than-expected underlying volumes as a primary concern.

Key points highlighted by Berenberg include:

• Like-for-like volumes fell 2%-3% in the first half as the company raised prices to offset cost inflation.
• A second-quarter supply chain disruption reduced sales by an estimated £10 million.
• Even after adjusting for this disruption, underlying volume growth of 1%-2% was deemed "modest."
• Sales of the company's flagship IRN-BRU brand, which accounts for about 30% of group sales, were flat year-over-year.

Berenberg also noted that management does not have any near-term acquisitions planned, removing a potential catalyst for the company's shares.

First-Half Financial Performance

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Despite the volume challenges, AG Barr's revenue for the first half rose 8.5% to £247.4 million, outpacing the broader UK soft drinks market growth of 6.7%. Adjusted operating profit increased 8.4% to £37.1 million, with the operating margin holding steady at 15%.

However, free cash flow swung to an outflow of £28.8 million from an inflow of £5.8 million in the prior-year period, which the company attributed to working capital movements and higher capital expenditures. Net debt rose by approximately £30 million from the end of fiscal 2026 to £47 million.

Company Guidance and Analyst View

AG Barr's management confirmed that the supply chain issues have been resolved and maintained its full-year targets for fiscal 2027, which include 10% revenue growth and a 15% operating margin. Berenberg noted it made only minor changes to its earnings estimates for fiscal years 2027-2029.

The brokerage identified potential risks for the company, including further manufacturing disruptions, weaker-than-expected benefits from cost-saving initiatives, and a potential government review of the UK's Soft Drinks Industry Levy.