‘Undervalued’ Gage Roads sees revenue near $40m


Poised to launch in Sydney after a year of operational investment, Gage Roads has reported revenues are up 20%. But investors are still undervaluing the WA brewer, say analysts.

Turnover for 2018-19 rose to $39.7 million in results released yesterday to the ASX, with the company hailing another year of “strong growth” after successfully integrating Broome-based Matso’s brands.

Gross profit was up 26% to $25.5 million, and the market liked what it saw, with Gage’s share price hitting 10.5 cents before closing at 9.4 cents yesterday.

Gage Roads has been building up its infrastructure and focusing on proprietary brands as part of its five-year strategy. As a result, sales of its Good Drinks brands rose to 8 million litres in 2019, up from 5 million litres in 2018.

It also invested $8 million in a packaging line expansion which is reportedly on track, as is the $3 million Redfern venue under Gage’s Atomic Beer Project brand.

Clear execution of its strategy, including the move towards own brands over contract brewing, has led analysts at DJ Carmichael to say that the business is ‘undervalued’ and has potential for significant east coast growth.

Shift in sales mix

Gage as long been committed to a move towards its own brands and away from contract brewing, and this week’s results show the strategy has borne fruit.

As mentioned, proprietary brand sales were up 60 per cent to 8 million litres during the year – including nine months of Matso’s sales following its acquisition in 2018, which were previously categorised under the contract-brewed brands.

Combined, proprietary and contact brewing volumes equated to 13.2 million litres.

Gage Roads brew chief Aaron Heary said that the idea behind this is to wind down its reliance on contract brewing, and the acquisition of Matso’s in 2018 had accelerated these plans, moving target goalposts for the business.

“It was out of balance before and over-focused on the contract brewing. With the acquisition of Matso’s we’ve fast tracked that and eclipsed [the existing] 70% target fairly quickly.”

For the year, own brand grew to make up 61 per cent of total sales, up from 39 per cent in 2018. This is well ahead of original strategic forecasts as part of Gage’s five-year plan, which aimed for 70 per cent own brand sales by 2021.

As part of this move to focus on its own brands and raising awareness of them across the country, marketing spend grew exponentially, to $7 million for the year from $4.3 million in 2018.

Additionally, Gage hailed greater consumer awareness and further expansion into independent channels, which has seen sales volumes more than double with independent retailers, from 1 million litres last year to 2.4 million litres this year.

It was a move away from Woolworths and a change in trading terms that allowed the expansion into what Heary considers more “natural” channels for Gage.

Explaining the change in terms, Heary said that Woolworths’ payment periods have been extended.

“There’s a hit to cash flows now we have to fund the extended period in time in which they pay us, it just sits on our balance sheet. We used to have more favourable trading terms but this is more in line with industry standards.

“Previously we didn’t have any independent retailers, we sold solely through Woolworths. Now we’re not partially owned by Woolworths, the whole independent part of the market has opened up for us.

“It’s a natural rebalancing again, but this time of our customer base. We’re really passionate about supporting independents, and we’re keen to grow back into a more normalised customer base for our business.”

That’s not to say Woolworths aren’t an important supplier of Gage Roads’ beer, he said.

“They’ve been really supportive of us and we have a strong relationship with them. But we were well ranged in Woolworths and the opportunity to grow in that environment was limited. The opportunity to grow our presence is now in the independent space.”

Nick Ivey, head brewer of Atomic Beer in Sydney

Sydney venue

Gage also announced yesterday that their $3 million Atomic Beer Project brewpub in the Sydney suburb of Redfern was “progressing well”, and Brews News recently reported that Gage Roads alumna Nick Ivey would be the head brewer for the site.

It’s the first venue for Gage over on the east side of the country, and analyst Michael Ron at investment brokers DJ Carmichael said that the project “ticks a lot of boxes” for investors, providing a predicted 2 million litres of additional capacity.

He mentioned that a $1 billion Mirvac development in Redfern which could potentially bring 18,000 people into the area, working at Commonwealth Bank, Channel 7 and CSIRO, suggesting that the venue has potential to be a good earner for Gage.

The purpose in setting up in Sydney is to improve awareness of proprietary brands and increase retail sales on the east coast, as well as benefitting from the site’s standalone financial return, said Gage Roads.

“It’s a new thing for us, but it’s obviously not novel in the industry. It really makes sense as we have a national brand but don’t have any bricks and mortar anywhere on the east coast, and more than our half our sales people are on the east coast, it gives us a home and is a low risk strategy,” explained Heary.

He said bringing in the best people for the site, including Ivey, and Stew Wheeler as general manager, brings venue and hospitality experience into the venture, and the business as a whole, which may not have been there before.

“It may be seen by some as a departure from our strategy, but it’s just about converting lots of contact-brewed beer into our own brands, under the Good Drinks strategy – how we get there might change but that’s the nature of business. It will drive profit and awareness and give our people a home on the east coast.”

What it really highlights is the earnings growth potential on the east coast over the next couple of years, said analyst Ron.

Institutional investor interest

Gage’s stock price performance has proved to be unremarkable over the past year, declining from highs of 14 cents to lows of 8.7 cents and hovering at the lower end of the spectrum in the past six months.

Despite, or perhaps because of this, institutional investors including Perennial and Spheria Asset Management have been upping their stake in the business over the past year, now both owning more than 8 per cent in holdings in the company each.

The backing of investors through an $8 million capital raising in April 2019 enabled Gage’s packaging line expansion, with a new commercial scale canning line and a high speed bottle filler among other upgrades.

The equipment is being commissioned in December and expected to be fully operational by Q3 FY20.

Analysts at DJ Carmichael said in a report prior to the full year announcement that Gage’s ability to raise capital via equity markets was a “key competitive advantage” compared to smaller craft brewers which struggle to fund an increase in scale.

They said it was following a similar model to Little Creatures and is becoming an “eventual takeover target” as profitability increases.

However, anyone following Gage shouldn’t hold their breath for a sale, said Heary.

“At the end of the day were on the ASX but we’re not for sale, we’re an independent brewery and we’ve adopted the independent logo on our products – we’re not positioning ourselves for a takeover but we are positioning ourselves for growth,” he said.

Listen to Matt Kirkegaard discuss the history and progress of Gage Roads Brewing Co with Aaron Heary and MD John Hodemaker on Radio Brews News.

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