Gage Roads’ Crafty Deal

This story features BROO LIMITED, and other companies. For more info SHARE ANALYSIS: BEE

WA craft brewer Gage Roads has won exclusive beer rights to the new Perth stadium. DJ Carmichael initiates coverage.

-Craft beer popularity on the rise
-Gage Roads wins major contract
-Brand exposure significant

By Greg Peel

Craft beer continues to grow in popularity in Australia. Over the past five years, revenue in the sector has grown at an average annual rate of 9.7%, stockbroker DJ Carmichael notes, and is expected to continue to grow at 6% per annum over the next five years as consumers become more health conscious, and show a preference for quality over quantity.

By contrast, the mainstream beer industry is expected to grow by only 2.1% over the same period.

Gage Roads Brewing Co ((GRB)) is the only craft brewer listed on the ASX with operations based in Western Australia, notes DJ Carmichael. To address the ambiguity of this statement, note Gage Roads was the only craft brewer listed on the ASX, period, after Little World Beverages, maker of popular Little Creatures beer, was acquired by Lion/Kirin, but since then Broo ((BEE)) has listed, and is based in Victoria.

So yes, Gage Roads Brewing Co is the only craft brewer listed on the ASX with operations based in Western Australia.

Exclusive Deal

Gage Roads has won a tender to supply beer with exclusive pouring rights to the new sports stadium in Perth, which has replaced the WACA for cricket and will become home to Perth’s major football teams. DJ Carmichael believes the deal will be key in driving brand recognition and will essentially provide free marketing for Gage Roads products to millions of people each year.

Let’s hope for Gage Roads' sake they don’t whack the extra craft beer premium on top of the already inflated prices one is forced to pay for the one-beer choice at a stadium lest punters are more aggravated than impressed by Gage Roads' offerings.

The contract win will also provide leverage to “tap” into new retail distribution channels and will assist in securing more tap points at bars and clubs across the country, the broker suggests. Moreover, it provides the potential for further partnership deals and events, further assisting brand enhancement.

This is important if the company is to successfully execute its ‘Return to Craft” five-year strategy of increasing volumes of its higher-margin craft beer while reducing production of its lower-margin, contract-brewed beer.

DJ Carmichael believes Gage Roads is well placed to take advantage of the growing craft beer market. Since 2010 the company has spent $25m on state of the art brewing equipment with a capacity of 17.4m litres per annum. Gage Roads is currently only producing 11m litres per annum.

Despite the capital expenditure, the brewer's balance sheet has no debt and $5.6m in cash, in the wake of a 2016 capital raising.

DJ Carmichael has initiated coverage of the stock with a Speculative Buy rating and 12c price target (last trade 8.1c).

Consolidation

The fact that the highly successful Little Creatures brewer was acquired by the Japanese beer behemoth and other successful brewers of the past, such as Hahn, have also been snapped up by the majors, raises the possibility of whether Gage Roads, too, might be a takeover target.

Critical to the possibility is that in 2016 the company was able to buy back 23.5% of its own equity owned by Woolworths ((WOW)), thus removing a potential blocking stake were an offer to be made. M&A activity in the craft segment has been increasing of late, DJ Carmichael notes, as large brewers opt for an easy way to jump on the craft bandwagon.

However, the broker believes Gage Roads would need to increase the proportion of its craft brewed products before a major would likely look to acquire a stake with Woolworths still being a major customer.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms