Buy Nichols (NICL) at 340p

A tip from SmallCapShares.co.uk

Today's free share tip is from Small Cap Shares. The team at Small Cap Shares first recommended shares in Nichols in the December 2009 newsletter at 292.5p per share. Investors who got in at that share price are currently standing on a 15% gain but according to our analysts the shares remain a buy. For more long-term growth ideas on fully listed small caps and penny shares click here.

Nicholas is probably best known to investors for its fruit flavour soft drink Vimto, which was created in Manchester by the company's founder in 1908. First listing on the Manchester Stock Exchange in 1961, the company transferred its share capital onto AIM from the Official List in May 2004 alongside a strategic review. Since then Nichols has operated through two divisions: Soft Drinks and Dispense.

The core Soft Drinks business sells and markets Vimto in over 65 countries around the world, as well as the Panda and Sunkist brands in the UK. The flagship Vimto brand is sold in a variety of drink formats, including carbonated, still and cordial. Nichols exports the concentrate - which consists of a secret blend of three types of fruit, essences, herbs and spices - to licensees around the world, who then produce the final product. It also earns revenues from licensing the brand for use on branded sweets and confectionary products, such as Vimto Tongue Ticklers and Vimto Bon-Bon Bags.

The Dispense operation focuses on the sale of soft drink concentrate to wholesalers and third party distributors in the UK. The concentrate is then sold mainly by pubs, hotels, restaurants and other venues in the leisure industry to customers as draught drinks. The division consists of the UK wide Cabana business, South-west England focused Beacon, Scotland only distributer Cariel and the recently acquired Dayla business. Dayla, in which Nichols bought a 50% stake in December last year, packages and manufactures "bag in box" syrup under license and specialises in premium orange juice dispense.

In a recent trading update the company reported that it experienced further strong trading during the second half of the 2009 financial year. As a result full-year results are expected to be considerably higher than in 2008 and "significantly ahead" of market expectations. The Merseyside based company also announced the acquisition of the trade, brand and assets of the Ben Shaws' soft drinks "on draught "business for an undisclosed amount. Ben Shaws is the fourth largest player in the UK soft drinks dispense market (Nichols is number three) and the deal will result in the coming together of the two largest remaining independent soft drinks dispense firms in the country. No details regarding Ben Shaws' financial performance were release but Nichols expects the deal to be earnings enhancing in the current financial year.

Following the news house broker Brewin Dolphin upgraded its stance from "add" to "buy" and increased 2009 and 2010 forecasts significantly. Earnings estimates for the 2009 financial year were raised by 11.2% to 23.7p, while 2010 estimates were upped by 12.3% to 25.3p. These value Nichols at 14.3 times 2009 expected earnings and on a multiple of 13.4 for 2010. In addition, the broker expects a dividend of 12.1p for the 2009 financial year, which means that the shares could also offer a decent yield of 3.6%. We believe this is an attractive price to pay for a company with strong brands that managed to grow strongly through the downturn, which is expanding internationally and which offers a reasonable income. BUY.

Key Data

EPIC: NICL
Market: AIM
Spread: 335p - 344.75p (2.83%)

Small Cap Shares serves up 3 hot tips a month and real time updates on the website on significant news from stocks covered. Although we will recommend AIM listed shares our focus is on fully listed growth plays ideal for building an ISA portfolio. For access to the latest tips at Small Cap Shares click here.