Is Nichols profits warning an opportunity?

Vimto maker Nichols (NICL) has long been the toast of investors thanks to its progressive dividend, strong balance sheet and geographic diversity. These qualities are why the AIM company’s share price surged to a record high in the summer and have risen by more than 800% since 2009.

The question for investors after today’s profits warning is whether its Middle East trading difficulties are a short-term hit or something more significant.

The blockade of Vimto shipments to war-torn Yemen will mean the Merseyside-based company will only match profits this year at around £30.4 million. It also warned of low single digit percentage profit growth in 2018, prompting N+1 Singer to cut more than £3 million from its estimates.

The broker said the company’s inability to send concentrate shipments to Yemen will be an issue for trade around Ramadan, which begins in May. With its sugar content and strong flavour, the cordial drink is a popular way for Muslims to break their fast during the holy period.

A reported slowing in the Saudi economy is also a worry for investors, with the Middle East region representing a large slice of international sales.

N+1 Singer said the Yemen developments should not overshadow an excellent UK showing, with Vimto sales growth of 9% significantly ahead of the wider market growth of 2.3%.

There was also a positive performance in Africa, with revenues growth of more than 20%. Last year, the company generated £90.7 million of sales from the UK, with another £26.6 million coming from international markets.

It pointed out today that the group remains highly profitable, with a strong balance sheet and cash generation able to support ongoing investment.

Furthermore, the company sought to reassure investors by adding that this also included its ability to sustain a progressive dividend policy.

Nichols trades on a relatively high rating, with its shares on a PE ratio of around 23, putting off some value investors. The dividend yield is 2%.

Despite the current turbulence and events outside of management’s control, N+1 Singer said it continued to back the company and its prospects.

They said: “We remain positive on the mid-long term attractions of the group.”

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.