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 key segments including proprietary brand brewing and contract brewing. The products of the company range from ales to lagers. 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 flavours 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 29 May 2020, the market capitalization of the company stood at ~$58.17 million. During FY19, the company reported momentum in its proprietary Good Drinks brands and delivered on key leading indicators during the third year of the 5-year proprietary brand strategy. Strong growth across all channels resulted in total proprietary brands sales for the year up by 61% to 8 million litres. This resulted in the revenue to increase by 20% to $39.7 million, and gross profit of the company witnessed an increase of 26% to $25.5 million. FY19 was a strong year for the company owing to its increased earnings and thus, a 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. This shift in sales mix has improved total gross profit to 64% in FY19 from 61% in FY18. The company continued to invest in its marketing, distribution, and national sales capabilities in major markets, and thus provided growth in distribution outlets and sales. FY19 sales of Good Drinks brands to the national chains stood at 3 million litres, up by 27% on FY18. The sales growth did not come up with additional expense rather increased the awareness of Gage Roads’ brands in all markets. 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. Proprietary sales along with AQB volumes resulted in a total throughput of 13.2 million litres. In addition, it resulted in an increase of 25% in unaudited EBITDA to $5.5 million for FY19. The company finished the financial year with a cash balance of $9.3 million and a debt-free position.

During 1H20, Good Drinks strategy built a solid base for the future growth of earnings, including the expansion into the east coast and the business is on track to achieve the strategy’s longer-term targets.

With further headroom in credit facilities, the business is in a solid financial position, offering an excellent platform to execute its 5-year strategy. The company grew its scale of distributions and hence, 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 11.10%.  


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Financially 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 year on year improvement and stood at 1.48x, up from 1.34x. 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)

Strong Customer Demand and Decent Increase in Revenue: The company’s strategy to diversify its channel mix has delivered strong growth across the independent channel and on-premise draught channel, which resulted in an increase of 17% in total Good Drinks brands volume to 4.2 million Litres for the half-year. In the same time span, the growth in sales of its own brands has resulted in an increase of 10% in revenues to $19.3 million. 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%. Strong demand of the consumers has resulted in lower inventory balances, indicating a strong brand shape. During the half-year, GRB deleted several non-performing brands with a view of a strong new product development program. The combination of the shortfall of sales combined with 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 unwinding of the debtor position and the inventory levels are expected to have a positive impact on the cash flow in the second half of FY20. The business remains funded through the decent headroom in facilities, with the operating cash flows and existing facilities.


1H20 Financial Highlights (Source: Company Reports)

Impact of COVID-19 on the Company’s Operations: 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 hence 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 in maintaining a regular supply of its full range of products and will avoid any out-of-stock scenarios for its customers.

Future Expectations and Growth Opportunities: The company is investing ahead of the curve in the right areas of the business to drive future growth. 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 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 in high quality and volume brewing packaging facilities to support the craft category better than most of its peers. 

The COVID-19 situation is evolving and unpredictable, and its impact on businesses is uncertain. However, the company is expecting a continued demand for its products and has the ability to serve at full capacity. 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 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 company has formulated a plan to manage the impact of COVID-19 and focused on meeting the increased demand for its products. It believes that the set strategy and targets are sound and 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 levels of $0.035. This offers a good opportunity for investors to enter the market. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 12.95% in revenue and a CAGR of 26.99% in gross profit, indicating growth in sales of higher-margin brands. We have valued the stock using EV/Sales multiple based relative valuation approach and have arrived at a target price, offering an upside of lower 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, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.056, up by 9.804% on 29 May 2020.
 

GRB Daily Technical Chart (Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.