United Malt Group Limited

UMG Details

Declaration of Dividend: United Malt Group Limited (ASX: UMG) is engaged in an international distribution business (Canada, US, Australia, and the UK) which provides a full service offering for craft brewers and distillers, including malt, hops, yeast, and related products. UMG has declared a dividend of $0.02 for its shareholders. The ex-date for the dividend will be on 2 June 2021 and the payment date will be on 18 June 2021. 

Mixed Performance Across Segments During 1HFY21: UMG has registered a decline in revenue by 11.4% YoY to $453.2mn in 1HFY21 from its processing segment. EBITDA declined by 36.8% YoY to $39.2mn in 1HFY21. The company has seen an increase in capital expenditure for processing segment to $45.1mn in 1HFY21 against $28.0mn in 1HFY20. UMG has reported an increase of 11.9% YoY in its EBITDA to $17.8mn for its Warehouse and Distribution segment despite a decline in revenue during the same period. The company has seen an increase of 150% YoY in its capital expenditure to $2.5mn in 1HFY21 for Warehouse and Distribution segment. 

1HFY21 Financial Highlights: Due to impact from Covid-19 situation across key regions and an increase in corporate costs, UMG has registered a decline in top-line to $589.6mn in 1HFY21 against $664.6mn in 1HFY20. Similarly, the company has registered a decline in bottom-line to $13.2mn in 1HFY21 against $18.8mn in 1HFY20. The company has registered a decline in its non-current borrowings to $335.7mn as on 31 March 2021 against $348.1mn as on 30 September 2020.

Result Summary 1HFY21 (Source: Company Reports)

Key Risks: The company deals in multiple currencies. Thus, any adverse movement in foreign exchange currency prices may lead to financial losses for the company. Moreover, the company holds interest-bearing liabilities. Thus, any severe change in interest rate may lead to higher interest costs for the company.

Outlook: UMG continues to focus on capitalising growth opportunities and implement strategies for sustainability over a medium term. The company is planning to invest £51mn in UK to expand its malting capacity in the Bairds’ Scottish malting facilities, adding 79kt of capacity for its Arbroath and Inverness sites. Inverness site is expected to be completed in May 2022 while Arbroath site has been producing at full capacity. UMG is also undertaking the replacement of its Perth Kiln by spending $27mn. The replacement project is expected to be completed by October 2021 and provides a future opportunity for expanding production capacity. UMG is expecting its capex to be ~$120mn for the full year. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of UMG gave a return of ~7.93% in the last one month and a return of ~13.95% in the last three months. The current market capitalisation of UMG stands at ~$1.32bn as of 19 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$3.530-~$4.970. On the technical analysis front, the stock has a support level of ~$4.053 and a resistance of ~$4.88. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering a decline in total liabilities as on 31 March 2021 and expanding production capacity to boost revenues. For this purpose, we have taken peers Treasury Wine Estates Ltd (ASX: TWE), Lark Distilling Co Ltd (ASX: LRK), Graincorp Ltd (ASX: GNC), to name a few. Considering declaration of dividend, decline in non-current borrowings, plans to expand malting capacity, current trading levels, and valuation, we recommend a “Hold” rating on the stock at the current market price of $4.49, up by ~1.583% as on 19 May 2021.

UMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Keytone Dairy Corporation Limited 

KTD Details

Concluded FY21 With a Robust Revenue Growth: Keytone Dairy Corporation Limited (ASX: KTD) is engaged in manufacturing and exporting of nutritional dairy products with a focus on powdered milk products. The company owns the brand names, KeyDiary, KeyHealth, and FaceClear. KTD has recorded an increase of 125% YoY in its revenue to $50.7mn in FY21 against $22.5mn in FY20. The company has witnessed a revenue growth across all its segments in FY21. Australia Contract Manufacturing segment has posted a revenue of $35.2mn in FY21 against $16.8mn in FY20. NZ Dairy has registered a revenue growth to $11.3mn in FY21 against $5.0mn in FY20 due to the second manufacturing plant in New Zealand. Other Brands has seen a revenue growth to $4.2mn in FY21 against $0.7mn in FY20. The company has built an additional inventory on contract from Coles. The company has incurred a one-off cost in Q4FY21 to secure a warehouse in Melbourne to improve gross margins in FY22. Similarly, the company is optimising other costs to improve its margins, going forward.

Sales Performance (Source: Company Reports) 

Q4FY21 Financial Highlights: The company has registered an increase in its consolidated cash receipts received from customers to $13.7mn in Q4FY21 against $12.6mn in Q3FY21. KTD has posted an increase in its group sales to $13.2mn in Q4FY21 against $8.7mn in Q4FY20. New Zealand Dairy has seen a significant improvement in Q4FY21 with sales increased to $3.4mn against $2.6mn in Q3FY21. 

Key Risks: The company deals in multiple currencies. Thus, any adverse movement in foreign exchange currency prices may lead to financial losses for the company. Moreover, the company requires a regular supply of its products to the clients. Any supply chain disruptions may lead to impact the business of the company.

Outlook: The company remain focused during Q4FY21 to optimise its cost to improve its profit margins, going forward. The company is likely to finalise the capability enhancements for its Keytone’s Sydney protein bar/snacking plant in Q1FY22. 

Stock Recommendation: The stock of KTD gave a return of ~-22.85% in the last one month and a return of ~-43.74% in the last three months. The current market capitalisation of KTD stands at ~$36.86mn as of 19 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$0.132-~$0.320. On the technical analysis front, the stock has a support level of ~$0.131 and a resistance of ~$0.199. On a TTM basis, the stock of KTD is trading at an EV/Sales multiple of 1.1x, lower than the industry median (Food & Tobacco) of 1.5x. Considering a robust top-line growth in FY21, optimising costs to improve margins, increase in cash balance, current trading levels, associated risks with the business and valuation on a TTM basis, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.135 as on 19 May 2021.

KTD Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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