Gage Roads can capitalise on craft beer boom: MD

John Hoedemaker - Picture by Nic Ellis

John Hoedemaker – Picture by Nic Ellis

Few craft breweries will have the enviable scale and capacity of Gage Roads Brewing Company if it succeeds in ‘Returning to Craft’, says managing directorJohn Hoedemaker.

On Thursday September 8, Gage Roads completed its $1.6 million placement of shares to institutions as part of a $10.1 million capital raising that will buy back retailer Woolworths’ 25 per cent stake, as well as repaying and refinancing debt.

“Demand for the institutional placement has been strong and sets a positive tone for the upcoming entitlement issue,” Hoedemaker informed the ASX on Thursday.

Also last week, Gage Roads announced the packaged release of Little Dove New World Pale Ale, which earlier this year was named AIBA Champion Australian Beer.

But aside from quality beers, Hoedemaker told Australian Brews Newsthere are plenty of other reasons for shareholders to be confident in the future of the company, which has endured a torrid time on the ASX since listing late in 2006.

Capacity and scale
He said the [craft beer] market is currently growing at about 15 per cent a year, and very few independent brewers have access to production capacity at a comparable scale to Gage Roads.

Including contract brewing for Woolworths, Gage Roads’ current production volume is 11 million litres of beer. The company claims it has the ability to increase this capacity to 17.4 million litres without significant further capital expenditure.

And while it has clearly been a double-edged sword, ranging of Gage Roads’ packaged beer through Woolworths stores has helped grow the brand considerably from the 70,000 case equivalents it achieved in 2009-10 when the relationship began.

In 2015-16, the Gage Roads brand sold 350,000 case equivalents. At almost 2.8 million litres, this would already place it comfortably in the top ten independent craft beer brands, once it has been unshackled from Woolworths.

“That shows there’s a real group of consumers around Australia that appreciate what we’re doing,” Hoedemaker said.

“Taking those brands into the rest of the market, being the independent bottleshops, we’ve got the scale and the brands to be able to achieve a much more successful outlook than we had when we first started the business.”

Improving the contribution of draught beer would also reap dividends. The prospectus says Gage Roads makes margins of 80 to 85 per cent on its draught beer, yet little more than five per cent (150,000 litres) of its volume is currently draught.

AIBA Champion Australian Beer, Little Dove

AIBA Champion Australian Beer, Little Dove

By today’s benchmarks, Gage Roads would be the biggest indie craft brewer in Australia, if it ratchets down all production of mainstream beer for Woolworths, converting itsentire current volume of 11 million litres to its own brand.

With scale, capacity and brewing prowess assured, the success of the ‘Returning to Craft’ strategy rests on the company’s marketing and distribution smarts.

Share offer explained
Gage Roads shareholders now have until the close date of September 28 to take up their entitlements to purchase four shares for every five they currently own, raising the remaining $8.5 million.

Gage Roads shares were trading at 6.8c prior to the announcement of the share offer on August 30.

They are currently trading at 3c, after the market reacted sharply to the discounted 2.5c offer price the company settledon to entice institutional investors.

Shareholders who do not take up their ‘four for five’ entitlements will have their shareholdings diluted by about 44 per cent as a result of the capital raising.

Aspiring investors looking to get access to the 2.5c offer would first need to purchase shares at the current market price of 3c.

The ASX’s minimum allowable investment of $500 would buy 16,667 shares (excluding brokerage and charges).

This would give entitlements to purchase a further 13,334 shares at the discount rate of 2.5c a share, costing an additional $333.35.

So an investment of $833.35 would deliver an impressive sounding 30,001 shares. Of course, there will be 767,398,127 Gage Roads shares trading after the offer, so this represents a 0.000039 per cent stake in the company.

The Gage Roads share offer is fully underwritten, but requires shareholder approval in order to proceed. The company’s AGM is on September 30.

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