Fourth quarter 2018 update
FY18 EBITDA higher than our forecast: GRB’s unaudited FY18 earnings were $4.5m, slightly beating our forecast of $4.2m and was 25% higher than FY17’s underlying EBITDA of $3.6m. Last year’s statutory EBITDA of $4.4m included a one-off compensation payment and ATO refund which increased earnings.
Total FY18 sales higher than our conservative estimates: Strong uplift in combined sales of GRB’s brand (ex. Optus Stadium & events) and contract brewing volumes came in at 11.9m L vs our conservative estimate of 10.7m L. Contract brewing volumes of 7.7m were significantly higher than our expectations of a wind down to 6.8m L, from the 7.2m L sold in FY17. Sales of GRB’s proprietary brands were 4.2m L (up 24% YOY) which was slightly lower than our expectations of 4.4m L. Total proprietary brand sales, inclusive of the Perth Stadium and other marketing events, totalled 5m L, increasing 47% YOY. The strong increase in proprietary volumes came as a result of a 181% upli ft in sales to independent liquor stores with Single Fin and Alby performing strongly. Draught sales were also a significant contributor, increasing by 218% over the previous year.
Strong operational cash flows: The strong increase in sales for the quarter saw $2.9m in operational cash flows recorded, following on from last quarter’s inflows of $2.1m. This has resulted in GRB’s balance sheet strengthening further with a total of $16.9m sitting in cash, excluding the additional $2m received from the SPP after the end of the quarter. $10m was recently raised through a capital raising with funds required to settle the $13.25m cash portion of the Matso’s acquisition which is expected to be finalised this quarter.
Increasing our volume expectations: Management noted that proprietary sales to national retail chains were down 15% over the year, compared to Q4FY17 following a one-off stock build resulting in lower replenishment sales in Q1FY18. With no stock build sitting at the end of this year, 1Q19 sales are expected to see a positive improvement over last year. With the strong momentum behind the brand continuing, we increase our estimates for proprietary sales volume growth to 25% for FY19 vs our prior conservative estimates of only a 20% uplift. We also reduce the rate of decline in contract brewing volumes.
Valuation and Recommendation
We increase our valuation and price target to $0.135 per share from $0.125 per share based on DCF methodology, as a result of the slightly higher craft sales growth expectations and slower wind down in contract brewing volumes. We also roll forward our DCF valuation. FY19 should see a strong uplift in earnings with Matso’s expected to contribute strongly to GRB’s own suite of products with the acquisition expected to be finalised shortly. We maintain a Speculative Buy rating.
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The analyst does not hold securities in Gage Roads Brewing Co. Limited.
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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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