Good Drinks Australia Limited

Company Overview: Good Drinks Australia Limited (ASX: GDA) is an Australia-based independent brewery company which undertakes brewing, packaging, and marketing activities for the manufacture of beer and other alcoholic drinks. It sells products under the brand names: Gage Roads Brew Co (Gage Roads), Matso's Broome Brewery (Matso's), Atomic Beer Project, Alby, Hello Sunshine, and San Miguel. Its products under the Gage Roads brand include Single Fin, Pipe Dreams, Side Track, Little Dove, Rock Dance, and Sleeping Giant. The company started trading on ASX on 13th December 2006.

GDA Details

This report is an updated version of the report published on the 10th June 2022 at 3:55 PM GMT.

Joining Hands to Catalyse Growth:

• Transformative Agreement: Good Drinks Australia Limited signed a transformational agreement with Molson Coors, which will expand its channels to gain high margin in its house brands by further driving volume and margin growth. An accretion of $35 - $40 million in its revenue and $3 - $4 million in its EBITDA is expected through the contract.
• National Distributor Partnership: The company partnered with C&C International (a wholly owned subsidiary of C&C Group Plc), to represent its successful Magners Irish Cider range of brands in Australia. Later to the contract, GDA will turn out to be the exclusive Australian importer and distributor for the Magners Original Irish Cider in the category of 330mL bottles, 568 mL bottles and 49.5 L keg formats. The partnership is aligned to gain in the areas of market share on East coast of Australia and to support brands that drive incremental margin growth.

Sneak Peek of Financials:

• Maintenance of Growth Momentum in Q3FY22: Despite challenging Q3 market conditions like fewer drinking occasions, lower replenishments, density limits, mask mandates, staff shortages, and reduced overall trade, Total Good Drinks Volume showed a growth of ~14% to 10 million litres and overall volume showed a growth of ~18% and reported sale of 15.1 million litres on YTD basis.
• 1HFY22 Rising Revenues: The company’s sales volume and revenues grew by ~16%, while keeping gross profit margins strong at 67%. With controlling the operating cost structure well, GDA delivered a $6.0 million EBITDA and $32.9 million as its revenue.
• Sales by Channel: During the period of 1HFY22, promotional programming and distribution growth were well executed with the retail partners and 2.6 mL sales were contributed through them. Good Drinks was the fastest growing of the top 10 craft beer suppliers in Australia, where it sold 6.9 mL total Good Drinks volume while 3.7 mL was sold through its contract brewed brands.

On Rise Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 47.31% of the total shareholding, while the top 4 constitute the maximum holding. Perennial Value Management Ltd and First Sentier Investors are holding a maximum stake in the company at 14.57% and 9.01%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: GDA had a tough period during 2HFY21, and net margins dwindled a bit, until it regained its momentum in 1HFY22, reported as ~7.7%. On the other side, its cash cycle (days) also slightly increased and then reduced again in 1HFY22 to 2.1 days as compared to 25.2 days in 2HFY21.

Profitability Profile with Cash Cycle Days (Source: Analysis by Kalkine Group)

Key Risks:

• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the same could lead the business to fines, penalties, etc.
• COVID-19: Travel restrictions and lockdowns due to COVID-19 had reduced drinking occasions in December, which then reduced pull-through and reflected in lower replenishments in January and February.
• Market Tailwinds: Other risks arising from density limits, mask mandates, staff shortages, reduced overall trade and might hold down its operations and, thereby affecting its earnings, cash flow and financial position.

Outlook: The company aims to be the no. 1 Independent Supplier to the National Beer Market and targets to market 20 million litres by 2025. Though the industry might face margin sacrifice due to market-led price pressure and cost increases (COGS), but GDA targets its Gross Profit in the range of 65%- 70% (FY22: 66%) along with $1 per litre target for COGS maintained for FY22. However, the industry anticipates its margin to recover through price rise from 1 August 2022. Going forward, GDA’s venues will contribute material earnings and cash flows in FY23 and an addition of $35 - $40 million in its revenue and $3 - $4 million in its EBITDA is expected through the contract signed with Molson Coors. Moreover, with the aim of managing inflationary pressures through sales price and sales mix, GDA is targeting 18.8m litres volume for FY22 and its variable production costs within the target range (40c/L to 50c/L).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of GDA gave a negative return of ~1.38% in the past three months and a negative return of ~22.82% in the past six months. The stock is currently trading near its 52-weeks’ low level of $0.700. The stock has been valued using the EV/Sales-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ median EV/Sales multiple, considering growth momentum the company has achieved, new Molson Coors agreement and sales mix it maintains to counter inflationary pressure. For the purpose of valuation, a few peers like Treasury Wine Estates Ltd (ASX: TWE), Lark Distilling Co Ltd (ASX: LRK), United Malt Group Ltd (ASX: UMG) have been considered. Considering the current trading levels, decent growth in sales volume (3QFY22), expected revenue and EBITDA increment from strategic partnerships, strategy to grow production volume, Good Drinks venues expected earnings contribution in FY23, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.710, 12:30 PM (GMT+10), Sydney, Eastern Australia. as of 10^th June 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

GDA Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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