United Malt Group Limited

UMG Details

Substantial Shareholder Update: United Group Malt Limited (ASX: UMG) is a commercial maltster operating with Processing and Warehousing & Distribution (W&D) segments. UMG offers services to distillers, brewers, and food companies, while the W&D division distributes yeast, bagged malt, and related products. On 18 October 2021, Greencape Capital Pty Limited sold off its 1.776 million shares in UMG and ceased to be a substantial shareholder in the company.

FY21 Business Update:

• Improved Demand in North America: UMG plans to increase the on-premise beer consumption due to the reopening of venues, improved sales mix, and margins in the W&D business.
• Steady Distilling Market in the UK: The company is witnessing steady demand for the malt from the distilling market customers. The new facility in Inverness, UK is expected to be functional by July 2022, slightly delayed due to COVID-19 disruptions. The facility will provide for the needed malt capacity expansion and growing demand for aged whiskey.
• The company expects the FY21 statutory earnings to be affected (by ~$20-22 million) as one of its UK grain storage contractors announced insolvency. In another instance, UMG plans to provide for a bad debt provision in the FY21 accounts due to COVID-19 impact on an Asian customer of ~$16 million.

1HFY21 Takeaways:

• The revenue declined by ~11% YoY to ~$590 million in 1HFY21 due to COVID-19 impact on volume and change in the geographical mix of UMG.
• The EBITDA stood at $52.7 million for 1HFY21, higher than the provided guidance of $47-50 million in February 2021.
• The net cash inflows from operating activities increased from $0.8 million in 1HFY20 to $22.8 million in 1HFY21.

Net Cash Inflows from Operating Activities (Analysis by Kalkine Group)

Key Risks: The company faces the COVID-19 impact on-premises demand, export volumes & consumption in Asia. The pandemic has also led to increased ocean freight cost across the shipping markets and restricted the production capacity in line with the reduced demand & disruptions.

Outlook:

• The company is expected to release its FY21 results on 16 November 2021.
• UMG anticipates the malt volumes to achieve ~95% of pre-COVID-19 levels in FY21.
• With the adoption of a new Enterprise Resource Planning (ERP) and Transport Management Systems (an accounting SaaS), UMG expects the Underlying EBITDA between ~$123 – $128 million (reduced by ~$6 million) in FY21.
• The company forecasts Statutory NPAT in the range of $15 – $18 million in FY21.
• UMG is continuing with the transformation measures and targets to realise ~$30 million of net benefits in EBITDA till FY24.
• UMG expects to keep the gearing within its target ratio (target ratio of 2.0-2.5 times) as of FY21-end.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: 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 negative return of ~14.53% in the past three months and a negative return of ~5.06% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $3.530 - $4.970. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median EV/Sales multiple, considering the decrease in NPAT and revenue for 1HFY21, continuing COVID-19 impact on volumes & freight costs, and expected impact of one-time costs on the statutory earnings in FY21. For this purpose of valuation, few peers like Elders Limited (ASX: ELD), Costa Group Holdings Limited (ASX: CGC), Woolworths Group Limited (ASX: WOW), and others have been considered. Considering the current trading levels, improved net cash inflows and improved demand conditions in North America & the UK, newly commissioned facility Arbroath (Scotland), capacity expansions in FY22, new product offerings via W&D segment and indicative upside in valuation, we give a ‘Buy’ rating on the stock at the current market price of $3.940, down by 1.254%, as of 25 October 2021.

UMG Daily Technical Chart, Data Source: REFINITIV

 Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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