Company Overview: Gage Roads Brewing Co Limited is engaged in brewing, packaging, marketing and selling craft brewed beer, cider and other beverages. The Company operates through two segments: proprietary brand brewing and contract brewing. The Company offers a range of ales and lagers, which are crafted in Western Australia. The Company offers dry-hopped and unfiltered beers. The Company's beers include Little Dove, which is a new world-style pale ale; Sleeping Giant, which is an India pale ale; Single Fin, which is a summer ale; Narrow Neck, which is an American-style pale ale; Break Water, which is an Australian-style pale ale; Atomic, which is an American-style pale ale; Small Batch Lager, which is a European lager, and Premium Mid Pils, which is a Czech Pilsener.
 

GRB Details

A growing craft brewer, Gage Roads has continued to deliver on its 5-Year proprietary brand strategy of ‘Returning to Craft’, with 18 months already into it. The Company is in the second year of its 5-year strategy to improve sales mix and to uplift the margins and making it a higher-margin proprietary brand of beer. Greater consumer awareness combined with expanded access to these channels is expected to continue to increase the annual volumes of Gage Roads proprietary brands which will help in delivering improved margins and sustained earnings growth. The draught strategy is generating improved results with sales and distribution targets exceeding internal expectations.
 

Group’s Progress towards its Strategic Targets (Source: Company Reports)
 
Mixed Financial Performance for half year: During the first half of FY18, sales of Gage Roads higher-margin proprietary draught products increased by 167% over H1FY17. The increased proprietary brand sales and the lower Australian Quality Beverages (AQB) sales resulted in a total throughput of 5.4 million litres and this was in line with its strategy target of 11 million litres per annum but was down by 3.5% from H1FY17. These strong proprietary brand results delivered flat H1 revenues of $13.8 million (H1 FY 17: $13.8 million) and improved gross profit margin of 59% (up from 55% H1FY17). The gross profit margin is thus on track with the FY21 target of 70%. The Company recorded an EBITDA of $1.3 million for H1FY18, lower than $1.5 million that was reported for H1FY17, at the back of investments made in sales and marketing capabilities, increasing sales and marketing expenditure by $0.6m and also accounting for an additional $0.6 million in employee expenses while administration costs were lower in the current half-year. The net profit after tax attributable to members was also down 70% while net tangible assets per share remained same at $0.03. On the other hand, it is worth noting that the Company has paid down its debt ($2 million to the repayment) in full during H1 FY18 and has thus reduced its finance costs. Debt facilities (to an approved limit of $6 million) are intact and undrawn, and company ended the half-year with a cash reserve of $4 million. The group thus has strong financial platform to execute its proprietary brand strategy.
 

Half year Cash Flows (Source: Company Reports)
 
Excellent marketing efforts and strategy: During September 2017, the Group was formally appointed as the exclusive supplier of beer and cider to Optus Stadium and Stadium Park. Supplying beer and cider exclusively at one of the best venues in the world was an extraordinary opportunity for its proprietary brand strategy and a major milestone for Gage Roads. In exchange, Gage Roads has to provide annual right fees, volume rebates and sponsorship fees to the Operator. The Company successfully launched many products into the market. It signed a two-year partnership with Rugby Australia to become one of the official beer partners for the HSBC Sydney 7s event and this partnership reflected its marketing strategy so that it can use brand-in-hand events to drive increased consumer awareness.

Launch of New Products: It introduced Alby Draught (4.2%) and Alby Crisp (3.5%) which were selected as the main beer brands at Optus Stadium. These are the classic lagers that have a parochial Western Australian connection and a strong focus on locally sourced ingredients. This gives GRB the advantage of being the only regional brewer capable of producing high quality products. Lager beer is a beer that is proudly made in WA by locals and for locals and ALBY is a classic, no fuss, West Australian lager. It is made with 100% Western Australian grown barley and till now WA has not had a locally brewed lager since the big brewers shifted their production to the East Coast. Further, Hello Sunshine, is an apple cider extension to the Gage Roads Craft Range has been developed in collaboration with Fringe World. The group is thus well positioned to participate in the growing national cider market and all these products will be available through retail channel and will constitute the cornerstone offerings at Optus Stadium.
 

Brand Strategy (Source: Company Reports)
 
Improved Sales: The national sales and marketing capability showcased strong sales in relation to the independent retail channel, which was a solid contributor to the first half with a 184% growth over H1FY17. Despite the softer sales of proprietary products to the national chains, the strong growth in the independent retail and draught channels resulted in total proprietary brand sales for the half year being up by 16% and amounting to 1.85 million litres as compared to 1.60 million litres in H1FY17. During the half-year, the consumer demand at store level reduced the inventory balances to normal levels and the group now expects its full year sales to meet the targets. Gage Roads’ proprietary brands represented the most profitable products in sales portfolio and now represent 34% of the company’s total revenue stream against 29% of last year.

Positive Outlook for 2018: It is anticipated that the group will continue growing into the independent retail and on-premise channels to the market. GRB expects a stronger H2 with sales ambition of at least 11 million litres for the full year and expects that growth in earnings and margins will be in line with its 5-year strategic goals. With a flexible balance sheet, a management team strongly-aligned to shareholder and enhanced ability to drive revenue and margin growth allows Gage Roads to deliver growth in earnings and a sustained value for its shareholders. The momentum of the increased distribution through bottle shops and tap points of the brands was exciting and showed that its 5-year proprietary brand strategy is well on track. Impact of Optus Stadium is expected to improve brand awareness in 2018.
 

Sales Performance (Source: Company Reports)
 
Stock Performance: The East Coast of Australia is a key focus for the group and the Rugby Australia partnership seems to benefit the group. The group’s capital position is healthy that escapes any funding related issues seen for big players and the enhanced infrastructure capacity with project growth in next five years seems to be encouraging. The positive consumer response to the ALBY and Hello Sunshine brands will also boost Gage’s performance. If we look at the ROE, the same has advanced in 2017 from 2016, and is also above the industry median of 7.5%. The reinvestment rate has also been up compared to 2016. From macro standpoint, craft beer is expected to witness 15-20% growth rates and has only 10% of the total beer market. Thus, GRB has immense scope with support from its fundamental position. GRB stock price climbed up by 58.49% in the past six months but declined by 13.4% in the past one month (as at March 01, 2018) with some volatility and mixed half year result. By looking at the overall performance and recent price dip, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.084
 

GRB Daily Chart (Source: Thomson Reuters)

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