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

Gage Roads Brewing Co. Limited is engaged in brewing, packaging, marketing and selling craft-brewed beer, cider and other beverages, and 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, and continues to see success with its cost-neutral “brand-in-hand” marketing strategy, achieving increased sales through greater brand awareness. Sales to Optus Stadium, Fringe World, Rugby 7s and other highlights are delivering well and are expected to provide earnings’ stream that fully offset the costs of the strategy. Accordingly, it is on track to deliver growth in earnings and margins through the shift in sales mix towards higher-margin brands. The momentum of the increased distribution through bottle shops and tap points of its brands is exciting and shows that its 5-year proprietary brand strategy is well on track. Its partnership with Fringe World presents an exciting and rare opportunity to achieve significant long-term exposure for the Company’s brands and reinforces the ’brand in hand’ experience and continues to promote as part of its 5-year strategy.


Australian Beer Market (Source: Company Reports)

Encouraging Quarterly (3QFY18) Updates: It is pleased to present another quarter of strong growth, continuing the trend set by previous quarters that have driven increased earnings and ultimately higher value for its shareholders. Gage Roads continues to deliver on key leading indicators in the second year of the 5-Year proprietary brand strategy. In summary, this strategy seeks to increase the awareness of the Gage Roads family of brands and expand those brands into broader markets and helps in driving incremental sales from the previously untapped independent retail and on-premise channels to market. The business has recorded a remarkable Q3, lifting sales of its brands by 153% compared to the previous year.


Estimated Cash outflow for the next Quarter (Source: Company Reports)

The uplift in sales was driven by a 183% increase in sales to the independent retail channel and a 445% increase in draught keg sale, which was partially driven by the commencement of keg sales to Optus Stadium during the quarter. It also improved the sales of its brands through the national retail chains, up 58% on the same quarter last year. Sales to the independent retail channel, a key driver of growth for its brands, were a solid contributor to the YTD result, up 184% over YTD FY17. Strong sales in Q3 to the national retailers have offset the softer sales of Q1 and Q2. Strong growth across all channels resulted in total Gage Roads brands sales for the half-year rising up 56% to 3.52 million Litres in comparison to YTD FY17 (2.26 million Litres). Net operating cash inflows were $2.1 million for the quarter resulting from strong Q3 sales.

Extended Partnership with Fringe World: In early April, the Company announced that it has extended a key agreement that secures its status as exclusive beer and cider provider to Perth FRINGE WORLD for a further three years until 2021. This agreement complements the Company’s existing partnerships with Optus Stadium and Rugby Australia which are key components of Gage Roads’ events based “brand-in-hand” marketing strategy. These partnerships are an effective way to activate the Company’s products in the market. The first two years of the FRINGE WORLD partnership have markedly increased Gage Road’s brand awareness in Western Australia. Recently, Optus Stadium has outperformed expectations and can already be directly linked to increased awareness and sales of Gage Road’s proprietary products.


Capacity for Products (Source: Company Reports)

Red Rye IPA enters retail market: The Group recently launched its award-winning Red Rye IPA into the independent retail market. Red Rye IPA is an American-style beer, characterised by citrus hop flavour, rich malt flavour and a dry finish courtesy of the malted rye. Lately, it won “Best in Show” and “Champion Draught Beer” at the highly regarded Sydney Royal Beer and Cider Competition. It appointed Miles Hull as its National Marketing Executive. Miles understands the foundations of great beer brands and is able to deliver distinct and individual branding concepts. The Company issued 6,423,155 shares to a number of eligible employees at an issue price of $0.072 in accordance to the Company’s Executive and Employee Share Plan.


Proportion of the Sales Mix (Source: Company Reports)

Gross profits driven by shift in the product mix: The national sales and marketing capability performed strongly with sales to the independent retail channel a solid contributor to the first half, up 184% over H1 FY17. The Company’s draught strategy also generated improved results with sales and distribution targets currently exceeding its internal expectations. During the first half of FY18, sales of Gage Roads’ higher margin proprietary draught products increased 167% over H1 FY17. The Company recorded revenues of $13.8 million for the half-year, at par with those achieved in the previous corresponding period despite lower overall volumes (down 3.5%). The continued shift in the product mix towards the Company’s proprietary brands resulted in an additional gross profit of $0.45 million for H1 FY18 and GRB has lifted the overall gross profit margin from 55% to 59%, on track with its FY21 target of 70%. During the half-year, the Company applied $2 million to the repayment of all debt and the Company is now in a debt-free position. Net Tangible assets per share of $0.03 remained unchanged.


Forecast for Key Metrics (Source: Company Reports)

Outlook: Gage Roads’ brands growth and 5-year strategy are on track to deliver margin growth and earnings targets for FY18. Distribution and sales growth opportunities in the independent channel continue to grow. Opportunities are being explored to continue to shift Gage Roads brands beyond 39% of sales mix to drive margin growth. Its Focus on east coast partnerships and events will complement growing east coast distributions. Overall, it will increase national marketing visibility and consumer awareness and annual volumes are in line with expectations and commitments. Given the success of the brand-in-hand partnerships such as Fringe World, the Group is actively working on securing additional opportunities locally and on the east coast it will continue to drive brand awareness and sales of its brands will continue to deliver increased earnings for its shareholders. It is expecting to meet its full-year sales target of at least 11 million Litres of underlying sales.

Stock Performance: With a flexible balance sheet, a management team strongly aligned to shareholders, existing revenue streams and enhanced ability to drive revenue and margin growth going forward, Gage Roads is well placed to deliver growth in earnings and sustained value for its shareholders. The impressive Q3 and year-to-date sales’ results are testaments to the increased brand awareness and validation of the strategies behind its 5-Year Plan. Miles’ appointment will help it to accelerate those strategies into key markets on the east coast of Australia whilst maintaining and growing the fantastic momentum it has in Western Australia. It remains in a debt-free position and debt facilities (to an approved limit of $6 million) remain in place and undrawn. With additional headroom in its credit facility, it is in a strong financial position, providing an excellent platform from which it continues to execute its 5-year plan. ROE and ROIC on 30 June 17 was 2.3 per cent and 2.1 per cent, and whereas on 31 December 17, the values were 6.6 per cent and 6.2 per cent respectively. In last one year, the stock price was up by 127.7 per cent, followed by a dip of 10.8 per cent in the past three months. Meanwhile, the stock climbed up by 15.5 per cent in the past five days given the encouraging update. We give a “Speculative Buy” recommendation at the current market price of $0.084 (up 2.44% on May 04, 2018), as the performance of the latest Quarter (3QFY18) indicates that the group is achieving more momentum.
 

GRB Daily Chart (Source: Thomson Reuters)
 
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