This article is more than 9 months old

This article is more than 9 months old

Vimto-maker Nichols has warned profits could be hit hard next year by a tax on sugary soft drinks in Saudi Arabia and the United Arab Emirates.

The Middle East is an important market for Nichols because growing numbers of Muslims break their Ramadan fast with a glass of Vimto. The 50% tax on the retail price of non-carbonated sugary drinks was brought in at the start of December.

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Merseyside-based Nichols, which is also behind Levi Roots and Sunkist drinks, said it would not be able to determine how badly sales would be affected by the price increase until the end of the Ramadan trading period.

However, it warned the impact could result in 2020 profits falling “materially below current expectations”.

Shares in Nichols were down 11% on Monday afternoon, at £15.25.

Russ Mould, an investment director at stockbroker AJ Bell said: “The suggestion that profits could be ‘materially’ below current forecasts implies, by a crude rule of thumb, a downgrade of perhaps some 20% from the 2020 consensus of a pre-tax profit of £34.2m,” he said.

“Nichols has a net cash balance sheet and generates operating margins in the high teens with returns on capital employed to match, so some investors may be persuaded to view this as a short-term blip, although the ongoing regulatory pushback against sweetened drinks is a trend that must clearly be followed carefully,” he added.

It is the second time in three years that the drinks company has warned about profits because of issues in the Middle East. In 2017, Nichols said profits would take a hit after a collapse in sales in Yemen, which is still in the throes of civil war.

Saudi and UAE sales bring in about £7m for Nichols each year, while the wider Middle East accounted for about 7% of its sales in 2018.

Nichols said concocting a new recipe for its fruit-and-herb-based Vimto was not an option. Unlike the UK soft drinks levy, which came into force in 2018, the Saudi and UAE rules apply to all sweetened drinks, regardless of whether they are made with artificial sweeteners or natural sugars.

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The excise tax is aimed at improving public health in the Gulf states, which are also looking for alternative ways to raise funds that do not rely on oil. Taxes have also been imposed on cigarettes and vaping products.

The sugar tax is not believed to have hit the tail end of Nichols’ 2019 results, with sales expected to be up 4% and profit in line with forecasts of £32-£33m, despite a slowdown in the UK soft drinks market.

Nichols said it would issue another trading update on 9 January.