Company Overview: Gage Roads Brewing Co Limited (ASX: GRB) is engaged in the brewing of craft beer, lager beer, cider, and other beverages. The company reports its performance in two key segments, including proprietary brand brewing and contract brewing. The products of the company include unfiltered beers and specific products such as Little Dove, Sleeping Giant (India pale ale), Narrow Neck (American-style pale ale) and others that represent flavors from various regions across the globe. The company has introduced various brands to complement its existing brand portfolio, including The Atomic Beer Project, Matso’s, etc.
GRB Details
Expanded Access to National Markets and Sustained Growth in Earnings: Gage Roads Brewing Co Limited (ASX: GRB) is engaged in the brewing of craft beer, lager beer, cider, and other beverages. As on 24 July 2020, the market capitalization of the company stood at ~$55.87 million. During FY19, the company reported momentum in its proprietary Good Drinks brands and delivered on its key leading indicators. Decent growth across all channels resulted in an increase of 61% in total proprietary brands sales to 8 million litres. This resulted in an increase in revenue by 20% to $39.7 million and a growth of 26% in gross profit to $25.5 million. FY19 was a year of growth for the company because of its increased earnings and higher value for shareholders. In line with the company’s strategy, own brand portion of the total sales mix has grown from 39% in FY18 to 61% in FY19.
The company continued to invest in its marketing, distribution, and national sales capabilities in major markets, and provided growth in distribution outlets and sales. FY19 sales of Good Drinks brands to the national chains went up by 27% on FY18 and at stood 3 million litres. The sales growth did not come with an additional expense rather increased the awareness of Gage Roads’ brands in all markets. Proprietary sales blended with Australian Quality Beverages (AQB) volumes resulted in a total output of 13.2 million litres. In addition, it resulted in an increase of 25% in EBITDA to $5.5 million for FY19.
During 1H20, Good Drinks strategy built a base for the future growth of earnings, including the expansion into the east coast. The business is on track to achieve the strategy’s longer-term targets.
With further headroom in the credit facility of GRB, the business is in a healthy financial position, offering a decent platform to execute its 5-year strategy. The company grew its scale of distributions and has increased its market share.
FY19 Financial Highlights (Source: Company Reports)
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Gage Roads Brewing Co Limited. Perennial Value Management Ltd. is the largest shareholder in the company, with a percentage holding of 13.28%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Stable Balance Sheet and Decent Liquidity Levels: During 1H20, gross margin of the company stood at 35.3%, and EBITDA margin of the company was 1.7%. In the same time span, current ratio of the company witnessed a YoY improvement and stood at 1.48x, up from 1.34x in 1H19. This indicates that the company is liquid enough to pay off its current liabilities using its current assets. During 1H20, the company reported a financially stable balance sheet with assets/equity ratio of 1.67x and debt/equity ratio of 0.29x.
Key Margins (Source: Refinitiv, Thomson Reuters)
Increasing Customer Demand and Growth in Revenue: The company’s strategy to diversify its channel mix has delivered decent growth across the independent channel and on-premise draught channel, which resulted in an increase of 17% in total Good Drinks brands to 4.2 million Litres for the half-year ended 31st December 2020. During 1H20, the own-brand portion of the total sales mix has grown to 68% from 62% in 1H19. This shift in sales mix towards own brands has improved the gross profit margin to 69%. The strong demand of the consumers has resulted in lower inventory balances, indicating a strong brand shape. The combination of the shortfall of sales combined with the continued investment in the Good Drinks strategy has impacted the half-year earnings, resulting in EBITDA of $0.3 million. GRB ended the half-year with a cash position of $5.7 million. The business remains funded through a decent headroom through operating cash flows and existing facilities.
1H20 Financial Highlights (Source: Company Reports)
Growth from Changes in Current Economic Conditions: Despite the softer market conditions due to the unparalleled challenges posed by the global pandemic, the supply chains and the brewery was fully operational. The company has witnessed a surge in demand and is operating at 80% higher than average output. GRB established a cold storage facility to store the products in the best quality conditions until delivery to customers. It remains confident that the measures taken by the company will help maintain a regular supply of its full range of products and will avoid any out-of-stock scenarios for its customers.
It reported a decent recovery in sales in May and June, outperforming the market. GRB has strengthened its key partnerships and is on track for positive momentum for FY21. The company has refinanced its credit facilities with a limit of $12 million. The borrowing facility will fund a broader part of its working capital cycle and provides capital to fund sales growth. The company has also completed a bookbuild and raised $5.2 million at an issue price of $0.052 per share.
Good Drinks Partners with San Miguel: The company has partnered with San Miguel Brewery Inc. to represent some of their most successful brands in Australia. Under the terms of the agreement, Good Drinks will be the exclusive importer and distributor of San Miguel Pale Pilsen, San Mig Lower Carb, and Red Horse throughout Australia.
Outlook: The company is investing ahead of the curve in the right areas of the business to drive future growth. The Good Drinks strategy is likely to expand the sales and marketing efforts which will accelerate the growth in brands on a national basis. The company is spending on high-quality and high-volume brewing packaging facilities to support the craft category better than most of its peers. Greater awareness in consumers along with expanded access to national markets and new channels, are likely to increase annual volumes of the brands, which will deliver improved margins and sustained earnings growth through the shift in sales mix towards higher-margin products. The cash flows of the company from ongoing sales, pre-existing credit facilities, high inventory balances and adjustments in the cost base is ensuring that the business maintains its capital flexibility.
Key Risks: The COVID-19 situation is evolving and unpredictable, and its impact on the business is uncertain. The company's activities expose it to a variety of financial risks, market risk (including currency risk and cash flow interest rate risk), credit risk and liquidity risk.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach (Illustrative)
EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The investment in packaging lines, increased sales capabilities and broadened brand portfolio are the key strategic pillars which are designed to secure the long-term success of the business. The company believes that the set strategy and targets are achievable, and hence the expectations for FY21 and beyond remain unchanged. As per ASX, the stock of GRB is trading at attractive levels, close to its 52-weeks’ low of $0.035. This offers a good opportunity for investors to enter the market. We have valued the stock using the EV/Sales multiple based illustrative relative valuation approach and have arrived at a target price, offering an upside of low double-digit (in percentage terms). Considering a flexible balance sheet, existing revenue streams, positive long-term outlook and enhanced ability to drive revenue and margin growth along with key risks stated above, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.044 on 24th July 2020.
GRB Daily Technical Chart (Refinitiv, Thomson Reuters)
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