Gage Roads Brewing Co Ltd (GRB) - Company Update

Matso’s acquisition a good strategic fit

GRB recently announced that its entered into a binding arrangement to acquire 100% of Matso’s Broome Brewing Ltd. for $13.25m cash plus a deferred consideration of up to $2.8m in cash or scrip. The transaction is being conducted at a ~7x incremental EBITDA multiple and we estimate that it will be 20% EPS accretive for FY19. We believe the acquisition carries low integration risk and is a good strategic fit, complementing GRB’s existing range of products. We expect the acquisition to increase GRB’s overall profitability and de-risk its future earnings streams.

Key Points

  • Cost of transaction: The acquisition will see GRB acquire Matso’s for around 7x incremental EBITDA, for an upfront consideration of $13.25m in cash with an additional deferred consideration of $2.8m (cash or scrip) to be paid subject to a number of sales volume targets being met over the next three years. Matso’s currently sells ~2m litres per annum generating ~$2.5m in EBITDA. GRB will also retain a three-year option to acquire Matso’s Broome based brewery venue.

  • Funding source: GRB is funding the acquisition via a $10m institutional placement which was oversubscribed, a $2m share purchase plan open for existing shareholders, both being conducted at $0.085 with the balance of $2m to be funded from its existing cash reserves of $5.6m (3Q18). The transaction is expected to be completed by 30 June 2018.

  • About Matso’s: Matso’s was established in Broome, Western Australia in 2000 and is best known for its alcoholic Ginger and Mango beers. Matso’s also produce Chilli, Lychee and other ale varieties which we expect to be complementary to GRB’s proprietary craft and Alby range. GRB has gained a strong understanding of the Matso’s business, producing most of its beers under contract at its Palmyra plant since 2007. As such, we believe the integration risks are low and is a good strategic fit. If GRB hadn’t moved now, with strong M&A activity occurring in the craft beer sector, a major brewer could have paid a higher premium putting the low risk strategic acquisition at risk, possibly also costing GRB a contract brewing customer.

  • Accelerates growth: The acquisition will provide a boost to GRB’s five year “Returning to craft strategy” which will see its proprietary product volumes, margins and overall profitability moving closer to its FY21 targets. We estimate that the transaction will be 20% EPS accretive for FY19. In FY19 WOW has a two-year option to extend its contract brewing contract with GRB. If WOW chooses not to exercise, the overall financial impact will be reduced following the Matso’s acquisition, removing some of its key customer risk.

Valuation and Recommendation

We increase our valuation and price target to $0.125 per share from $0.12 per share based on DCF methodology. We are impressed with strategic direction that management is taking with GRB and maintain a Speculative Buy recommendation.

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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.