Update ahead of FY19 earnings release
16 August 2019
Recommendation: Speculative Buy
Last Price: $0.09
Price Target: $0.13
Potential Upside: 44%
• Packaging line expansion to increase efficiencies: Earlier this year, GRB raised $8m placing 84.2m shares at 9.5c to fund the installation of a new commercial scale canning line, a new high-speed bottle filler and to fund other site improvements. GRB expects to see savings from labour & variable production efficiencies, reduction in wastage and materials costs. GRB’s ability to raise capital via equity markets is a key competitive advantage that it has over smaller craft brewers who generally struggle to fund the capex and marketing costs required to achieve scale, growth and profitability. The $0.4m in offer costs will reduce profitability for FY19 which we’ve incorporated into our numbers. GRB is targeting incremental EBITDA benefits of $1.5m to $2.5m p.a. by FY22, however we expect that GRB will need increase marketing spend to fully activate sales on the east coast which we see as partly offsetting these gains. This may turn out to be a conservative view.
• Sydney Redfern micro-brewery/taproom ticks a lot of boxes: A main concern of ours was for the location of the first east coast taproom. If GRB got this wrong from the outset, it could have put the project’s chance of success immediately at risk. The 578m2 inner-city site will house a small-craft brewery and 250-person hospitality venue which will be open to both public and trade. Its expected to provide up to an additional 2m litres of capacity.
Redfern and surrounding areas are undergoing a significant amount of urban renewal with new development projects. Google was planning on locating its Australian HQ to the area, but Mirvac’s initial development plans were rejected at the government level. Approval for the $1b project next to the Redfern station has now been granted and will eventually house 18,000 workers from Commonwealth Bank, Channel 7 and the CSIRO. The CBA tenancy is due to be completed by 2020 and will see 10,000 workers move to the site.
The Redfern site will improve brand awareness and is expected to increase retail sales on the east coast, potentially beyond their five-year FY21 “returning to craft” targets of 70% gross margin, 14m L pa. and $1 EBITDA per L. $3m in capex is expected to be spent by December 2019 with commencement of trade planned for 3Q FY20. The site is expected to be cash flow positive, which we haven’t factored in, potentially providing further upside.
• Institutional interest continues to grow: Over the past couple of months we’ve seen a lot of institutional movement on the register. Spheria Asset Management and Perennial Value Management increased their substantial holdings from 5.34% to 8.77% and 6.49% to 8.26% respectively, while AustralianSuper became a new substantial holder with 5.02%. The total institutional holdings in GRB now makes up 46% of the register, up from only 14% in April 2018, highlighting the growing institutional interest in the stock.
GRB has executed well on its strategy of shifting its sales mix away from lower margin contract brewing products to own brand products, boosting margins and profitability. We expect that the east-coast activation strategy will result in EPS growing by 60% CAGR over the next 2 years. In our view, GRB is following a similar model to Little Creatures and is an eventual takeover target as profitability increases. GRB is undervalued, trading at a 44% discount to our 13c per share price target. We maintain a Speculative Buy rating.
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