Gage Roads Brewing Co Ltd (GRB)

First Quarter 2019 Update

Key Points

  • Strong sales over PCP: GRB reported another quarter of strong growth with total proprietary brands volume up 176% on last year’s 1Q18 result as their brand awareness strategy continues to drive sales momentum. Over the year, sales to national retail chains rose by 208%, sales to independent retailers increased by 165% and draught sales (kegs) was 142% higher (excluding Optus Stadium).

  • Matso’s acquisition finalised: On 20 September, GRB completed the acquisition which should contribute significantly to cash flow and earnings going forward, with GRB previously announcing that in excess of $2.5m in EBITDA should be generated annually. As a result of the timing of the transaction, GRB expects $1.8m to be contributed to EBITDA in FY19. The acquisition will assist with accelerating their “Returning to Craft” strategy whereby they aim to move their sales mix away from lower margin contract brewing to their higher margin own brand products. GRB’s five-year target to achieve a 70% gross margin (currently 61%) and $1.00 EBITDA per litre (currently $0.38) can be achieved by FY21 according to our model, if they continue to achieve the strong sales growth in line with their targets.

  • Balance sheet and cash flows: GRB remains in a strong financial position with $3.2m cash in the bank and no debt sitting on the balance sheet. $1.4m in operational outflows were recorded in the quarter, which was an improvement on the $2.4m in outflows in the PCP, with $2m in additional cash receipts recorded. In line with GRB’s strategic plan, an additional $1m in marketing was spent to assist with increasing consumer awareness nationally. Historically 1Q tends to be one of the weaker quarter’s for GRB with softer sales generally seen over the winter period. We expect the remainder of the year to be stronger as Matso’s starts to contribute and as sales pickup over the seasonally stronger summer period.

    $0.9 in capital was spent on additional tank capacity and alternative pack formats, which we assume to mean a canning line, however no specific details were provided. Canned beer is becoming increasingly popular, particularly in craft, and is likely to provide minor margin improvement with the cost of production likely to be lower compared to bottled products. GRB is currently working on a brand refresh and plans to unveil a number of new products, likely ahead of summer.

Valuation and Recommendation

We slightly decrease our valuation and price target to $0.13 per share from $0.135 per share based on DCF methodology, mainly as a result of the lower Matso’s contribution to FY19 earnings due to the timing of the transaction, and as we increase our capex assumptions for this year to $2m from $1.5m. We believe that the recent pullback in the share price provides a good opportunity to buy GRB, with our forecast of 108% EPS growth over FY19. We maintain our Speculative Buy rating.

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The analyst does not hold securities in Gage Roads Brewing Co. Limited.

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Recommendation Definitions

SPECULATIVE BUY – Potential 10% or more outperformance, high risk
BUY – Potential 10% or more outperformance
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance
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Michael Ron

Research Analyst

Michael has been trading equities since 2003 and since joining DJ Carmichael in 2004 has worked in numerous roles in operations, trading, compliance and research. Michael’s expertise is in trading and equity strategy using a combination of both technical and fundamental analysis.

Michael holds a Graduate Diploma in Applied Finance, Diploma of Financial Markets, Diploma of Financial Planning, Advanced Diploma of Business Administration and is currently studying towards a Master of Applied Finance.