Good Drinks Australia Ltd

Company Overview: Good Drinks Australia Ltd (ASX: GDA) is engaged in the brewing and sale of beer, cider, and other beverages. Some of the popular brands under its portfolio include Gage Roads, Matso’s, Alby, Hello Sunshine, Atomic, to name a few. The company has formulated a strategy of 5-year plan to increase its output and the initiative delivered an additional 3.5 million litres of Good Drinks brands in FY21.

GDA Details

Revenue Driven by Continued Sales Momentum & Upliftment in Volumes: The company is an independent manufacturer and is reportedly the 3^rd largest beer manufacturer at a national level. Its brands are well perceived among the consumers and are represented across major growth segments.

Robust FY21 Performance:

The company has carried on with its sales momentum into FY21 and has delivered impressive performance in FY21 with sales volume growing at ~45%. It has exceeded its expectations of packaged sales compared to its internal target of 1 million cartons during the year.

• GDA has reported robust revenues of $54.41 million in FY21, reflecting an increase of ~48% in FY20. The growth has been aided by an increase in total good drinks volume to 11.4 million litres in FY21, compared to 7.9 million Litres in FY20. There has been ~30% upliftment in the contract brewed brands to 5.7 million litres during the same period.
• EBITDA of the company stood at $10.7 million during the year, an increase of ~1,683% on FY20.
• The company also witnessed an increase in gross profit to 69%, compared to 66% in FY20.

Trend in Revenue (Source: Analysis by Kalkine Group)

Brands Driving Margin Growth:

The management has been looking to position the company as a top-tier brewer and provide a complimentary spread of brands to its consumers at different price points.

• Single Fin, from its Gage Roads range, has delivered decent sales during the year with a growth of over 40%.
• GDA introduced San Miguel products to its portfolio of drinks in October 2020. The company exceeded its initial volume expectations from over 12 months of sales and is enjoying a cordial working relationship with San Miguel.
• It has also been successful in executing the Matso’s master brand refresh, which has been well perceived by its consumers.

Acquisition of Queensland Venue:

On 15 September 2021, the company has announced that it has entered into an agreement to purchase Joe’s Waterhole in Queensland for a consideration of $5.3 million. GDA plans to develop the venue into an attractive hospitality place and brewery for the Matso’s brand. The acquisition will be debt-funded through the Group's access to $12.5 million of venue finance facility.  

Top 10 Shareholders: The top 10 shareholders together form around 47.51% 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 14.63% and 9.04%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported decent margin performance in FY21 with most of the key metrics reflecting an increase over FY20. There has been an improvement in the current ratio of the company to 1.14x in FY21, compared to 1.10x in FY20. Asset turnover ratio also improved to 0.56x in FY21, compared to 0.47x in the pcp.

Profitability Metrics and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Regulatory Risks: GDA’s line of business makes it prone to the purview of prudent regulatory measures, which can have an impact on its operations and profitability.
• Financial Risk: The Group’s operations also expose it to credit risk, currency risk and interest rate risk.
• Macro Risk: The profitability of the company also depends on the demand for its products and the financial health of the economy. Any adverse impact on the general economic scenario due to macro factors like the ongoing COVID-19 pandemic might also impact the demand for the company’s products.

Outlook: The company plans to maintain its low cost, high quality, flexible and large-scale manufacturing advantage going forward, and plans to produce 20 million Good Drinks litres by FY25. It also anticipates consistent EBITDA growth per annum and target ~20-25% own-brand growth per annum, with 65-70% gross profit margin. GDA expects to continue with its sales momentum and deliver growth of over 20% in FY22.

Stock Recommendation: As per ASX, the stock of GDA is trading above its average 52-weeks’ levels of $0.053-$0.110. The stock of GDA gave a positive return of ~20.27% in the past nine months and a negative return of 8.24% in the past six months. On a TTM basis, the stock of GDA is trading at an EV/Sales multiple of 2.4x, lower than the industry average (Beverages) of 4.6x, and thus seems undervalued. Considering the valuation on TTM basis, a robust increase in revenues, rise in gross margin levels, increase in volumes, optimistic outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.087, (as on 08 October 2021, 10:05 AM (GMT+10), Sydney, Eastern Australia),

Technical Insights:

On the daily chart, GDA stock prices are trading in a rising channel pattern for the past 5 months and prices are sustaining above the lower band of the pattern and taking support of the same. Moreover, the momentum oscillator RSI (14-period) is trading at ~40.28, which indicates the possibility of rebound in the stock from the current levels. An important support level for the stock, is placed at AUD 0.080 while the key resistance level is placed at AUD 0.098.

Note: The purple color line in the chart shows RSI (14-period)

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.

Disclaimer

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