Perth-based stockbrokers favour Gage Roads Brewing

In a further sign that Gage Road’s fortunes are turning around, a Perth-based stockbroking firm has placed a speculative buy recommendation on the brewery.

The firm, DJ Carmichael, recently released a report recommending a target price of $0.12 per share. The brewery is currently trading at $0.085, with a 52-week high of $0.11.

Gage Roads is one of the country’s largest craft breweries and one of two publicly listed on the ASX.

The recommendation was based on the stockbroking firm’s view that revenue in the craft brewing sector has grown at an annual average rate of 9.7 per cent over five years and is expected to continue to grow over the next five years at an annual pace of 6 per cent.

In 2016 Gage, which has sometimes struggled to find a clear identity, began a shift away from its lower margin contract brewing operations to focus on higher margin proprietary craft brands. The West Australian brewery retrieved its independent status by buying back Woolworths’ 23.5 per cent stake as part of its “returning to craft strategy”.

The analyst’s report said the brewery has spent $25 million in capital expenditure at its plant since 2010 and is currently producing around 11 million litres per annum, out of a maximum plant capacity of over 17 million litres per annum. Its current volume puts it on par with Byron Bay’s Stone & Wood brewery.

By 2021, GRB will have room to lift production by 6 million litres per annum without the need to spend significantly on any expansion, the report said.

The valuation also noted Gage’s successful stadium tender, which allows exclusive pouring rights at Perth’s new Optus Stadium, and is a real “game changer” according to DJ Carmichael analyst Michael Ron.

“It’s almost like a free marketing platform, basically, essentially, free marketing as millions of people become more familiar with the brand.”

In wake of the five-year tender agreement, it also signed a two-year partnership with Rugby Australia to be one of the official beer partners at the HSBC Sydney 7s annual three-day event held at Allianz Stadium. It was the first time that craft beer had been served at the event.

The analysis notes the craft beer market is dominated by Lion (bought by Japanese giant Kirin Holdings in 2009), Carlton and United Breweries (owned by Belgium-based world giant AB InBev) and Asahi, which it said gives combined control over 70 per cent of the craft beer market.

DJ Carmichael believe that Heineken and Carlsberg, the world’s second and third largest brewers respectively, could eventually enter the Australian market by acquiring some of the remaining popular private craft brands.

This space is becoming smaller and is highly fragmented making it harder for them to gain any meaningful market share in the near term without a large amount of marketing investment spend. – DJ Carmichael

The recent Matso’s takeover will potentially alter some of DJ Carmichael’s initial findings. Ron is currently re-working the figures but remains optimistic.

Woolworths’ contact brewing agreement with Gage Roads is due to expire in 2019. While it’s unlikely Woolworths would discontinue the agreement, Ron says that the Matso’s merger has only served to further “de-risk” Gage Roads as a viable investment option.

“We should see strong earnings growth in the next few years.”

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