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Fever-Tree shares pop as Jefferies says there’s still plenty of fizz left

Analyst Edward Mundy says tonic will be the near-term growth driver, but sales of cola, ginger beer et al could add £25 to the share price over the longer term
fevertree drinks
Fever-Tree shares were priced at 134p at its IPO just over three years ago

Shares in Fevertree Drinks PLC (LON:FEVR) popped at the open on Friday after US investment bank Jefferies kicked off its coverage of the posh tonic maker with a bullish ‘buy’ note.

Fever-Tree has seen its market value more than double over the past year and Jefferies analyst Edward Mundy reckons there’s still plenty of fizz left, setting a punchy price target of £30.

READ: Fever-Tree regains its fizz after lifting profit expectations

“We see growth in tonics driving a standalone value per share of 2500p and bake in a further 500p on a 20% probability FEVR can capitalise on the non-tonic mixers category,” he wrote on Friday.

As Mundy points out, tonics are the AIM-quoted firm’s bread and butter but more recently management has started to branch out into other areas such as cola and ginger beer as they look to crack the US where ‘dark liquor’ is king.

Success in non-tonic business could add £25 to shares​

The analyst estimates the premium dark spirits market to be ten times the size of gin, meaning there’s a lot of money to be made if Fevertree is successful.

“There is a significant upside opportunity if FEVR can own and develop the premium mixer market, where current market leaders are less focused on the mixer occasion. We see upside of as much as £25 if FEVR is successful with its non-tonic strategy.”

Keeping up with the potential rise in demand for its tonics and other mixers shouldn’t be too difficult either as Mundy reckons the company was “designed from the start to be exponential”.

“Unlike the traditional bottler model, FEVR has no manufacturing assets with production/distribution outsourced. This offers flexibility, scalability, limited capex and strong cash generation.”

Competition only real risk

The analyst does note that competition is Fever-Tree’s “single biggest threat” as the likes of Schweppes and Britvic try to take a chunk of this emerging and lucrative premium mixer market.

“We would highlight competition from above (eg Schweppes), competition from below (eg Fentimans) as well as the risk of mixologists creating their own tonic waters.

“[However] FEVR has first mover advantage in terms of credibility, bar tender endorsement, brand awareness, penetration (20k on-trade outlets in UK), and trade contacts.”

Shares soared 10.5% to £24 in Friday afternoon deals.

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