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Bottoms up to 2020, but is it thumbs down to this UK income stock’s share price?

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Equity markets in the UK began 2020 on an ebullient note, with the FTSE 350 up by 0.9% on the first trading day of the year. However, as 2019 faded away, the ‘spirits’ of the alcohol world in the UK were dampened a bit. In this article, I’ll be trying to assess whether this would dampen prospects for Stock Spirits (LSE: STCK) after a brief background.

Data from the Wine and Spirit Trade Association (WSTA) showed that the popularity of champagne and other forms of sparkling wine dwindled in 2019. Sales of premium champagne tumbled by 28% to 13 million bottles last year. These bottles brought in a revenue of £613 million. For comparison, in 2016, over 23 million champagne bottles were sold, which had brought in revenues of £753 million.

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Filled to the brim?

It is the change in young people’s drinking habits that has led to the decline as the WSTA sees it. A surge in demand for cheaper options like Prosecco have eaten into the traditional champagne and sparkling wine market, too.

Philip Hammond, former Chancellor of the Exchequer, is also partly responsible for the decline. His increased tax in the 2018 budget, which came into force in February 2019, led to a rise in duty on still wine by 7p and on sparkling wine by 9p a bottle.

Taking ‘Stock’ of ‘Spirits’

Stock Spirits caters primarily to the Central and Eastern European region, with Poland and Czech Republic accounting for over 75% of its revenues. Though its “cases sold” and sales figures dwarf in comparison to heavyweights like Diageo, it is by no means an insignificant player. It thrives on locally and regionally popular brands.

The factors best in favour of the company include vodka being its mainstay and experiencing growth in terms of both volume and value. Poland being the third largest vodka market in the world certainly helps the company!

However, there are a few causes of concern. 30% of the company’s revenue now come from premium products. With both Poland and the Czech Republic proposing a rise of 13% and 10% respectively on spirit sales from January 2020, I cannot rule out a change in customer preferences towards premium products.

Further, Western Gate, while demanding a special dividend in December, had asked for a review of the company’s capital allocation policy. The firm, which owns 10% of Stock Spirits, has also expressed concern that its acquisitions – Dublin Liberties Distillery Company, Distillerie Franciacorta and Bartida – have not contributed to the company’s profits in 2019 at all. It further claimed that no returns from these acquisitions may be forthcoming until 2023.

2019 was a sobering year for Stock Spirits’ share price, which declined by 5%. In my estimation, a possible change in consumer tastes – especially due to increased taxation, and concerns raised by Western Gate – merit a cautious stance. I think it may be worthwhile to wait a bit, around two to three months, before raising a toast to the stock.

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Divyansh Awasthi has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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