Summer Series: Gage Roads Brewing Co (ASX: GRB)

Bryce: [00:01:15] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in forty five minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going, bro? [00:01:30][14.9]

Alec: [00:01:30] I'm very good. Bryce. How are you? [00:01:31][1.3]

Bryce: [00:01:32] I'm very well. We continue on our shallow dive of Australian companies on the ASX publicly listed that have been recommended by our community to have a bit of a look at. And we have had a great spread of companies and I'm really excited to be talking about this one today, Ren, because it certainly feels like it's going to fit within our circle of competence because it's all about beer. [00:01:52][20.8]

Alec: [00:01:57] Fair enough. Fair enough. No, I think this is a good one. It's an interesting one. [00:02:00][3.4]

Bryce: [00:02:01] So this one has actually been recommended a few times. Well, suggested a few times by the Equity Mates community. So I think [00:02:08][7.0]

Alec: [00:02:08] it was the most suggested when we put the call out for what stocks we should do for this segment. Nice. Yes. So we better do a good job of it. [00:02:17][8.7]

Bryce: [00:02:17] So we are talking about Gaige Rhodes Brewery CO. The ASX ticker is [00:02:24][6.4]

Alec: [00:02:25] grb [00:02:25][0.0]

Bryce: [00:02:26] job and it's currently trading at eight and a half cents. Yes. And market cap of ninety four million. So it falls within that small cap range. Yeah. And yes, some exciting times ahead. So Gaige Brewery started back in Fremantle, Western Australia over 14 years ago and have been crafting beer for quite a while now. They've got ales and lagers and all things in between. My favourite views and I'll Ren what about you say lager? I don't know. [00:02:58][32.6]

Alec: [00:03:00] What's the different [00:03:01][0.3]

Bryce: [00:03:02] spelling? Yeah. Yeah, there's four letters like I had six [00:03:07][4.7]

Alec: [00:03:08] I, I also got three letters, [00:03:09][1.3]

Bryce: [00:03:10] ales ales. [00:03:11][1.1]

Alec: [00:03:13] So let's actually break this company down and start explaining who it is. So it's been around for fifteen years. Bisimwa it's one of the largest independent brewers in Australia because the dirty little secret of the beer industry is, whilst it looks like there's a lot of choice when you look on those shelves, [00:03:33][20.3]

Bryce: [00:03:34] it's all the same. [00:03:35][0.5]

Alec: [00:03:35] You're all giving it to Continental United Asahi. There's not a lot of independent brewers. [00:03:39][4.6]

Bryce: [00:03:40] And how have they survived so long without being snapped up? I wonder just keep saying no or have they not even been offered an acquisition? [00:03:47][6.9]

Alec: [00:03:48] Oh, you'd have to ask them. They don't make that public. I don't think it's surprising. So they're worth about one hundred one hundred million bucks, which is pretty impressive in fifteen years for a small brewer, very heavily white based. The name relates to an actual road in WA, but they sell throughout Australia. Now their business is segmented in three main parts. So they've got their own brands, the gauge road brands. They've got volume that they contract brew. So essentially they brew for other companies. You know, if Liquorland wants to make a beer, they'll go to the market and say, we want to do a little and branded beer. Who can make it for us the cheapest. And so they do some contract brewing there. And then the third segment is a brand that a lot of people probably are familiar with, which is matzos. The ginger beer you're familiar with. [00:04:40][52.5]

Bryce: [00:04:40] I'm not Ren. I'm actually just looking at all their brands now, and I've never had one of their beers. [00:04:44][3.6]

Alec: [00:04:44] Yeah, right. OK, I've definitely yeah. I've had this ginger beer before. Their big brand in the Gauge Road. Our own brand portfolio is called Atomic Beer. I've never had that. I never heard about it. But maybe we're missing out and maybe we should move away from the this is [00:05:01][16.0]

Bryce: [00:05:01] making me so thirsty. I just want to quickly double back on something you said Ren. Before we get slammed by our Western Australian listeners. Gaige Rhodes is actually a strip of ocean. Oh, yeah. Rottnest Island and Fremantle in Western Australia. There you go. Not a hard surface road. So why is it called a road? I don't know. I haven't named the maps over in Western Australia. It's confusing. It is, yeah. Anyway, it's a strip of ocean. There you go out in the harbour somewhere. But anyway, back to the brands. [00:05:32][31.0]

Alec: [00:05:34] So the people who are not familiar with matzos, it's a relatively big brand, that gauge road purchased last year. So obviously they say growth in that sort of ginger beer, alternative beer space. But that's really the business in a nutshell. They are in the midst of a strategy they're calling return to craft. I think twenty nineteen was year three of that. And I think that is because they recognise that that's where the value is it compared to doing that contract brewing that I was explaining earlier, which they. For Endeavour, which is soon to be divested or sold, but amongst others, Pinnacle Likit Group, I'm not sure who they are. These are liabilities as well. OK, so it looks like they do a bunch of contract brewing for Woolley's, but the margins are squeezed there and you don't it's not your own brand, so you're not building any brand equity by brewing those beers. So they're they've got this strategy that they started in F 17 called returning to craft. So they're three years into that at the moment. And if you have a look at how the growth of their own brands has fared, they grew twenty three percent between 15 and 19. So you can see that real focus on pushing their own brands, those brands that you looked up and you'd never heard of at the same time, their contract brewing volume dropped. Part of that was because of the acquisition of this mezzos brand. So that's the business in a nutshell. Any anything to add at that point? [00:07:11][97.5]

Bryce: [00:07:12] I'm just so surprised that they've managed to remain independent. Well, I guess I'm just looking at the strategy. And the number one is to become the number one independent supplier to the national beer market. So they obviously are in [00:07:22][10.5]

Alec: [00:07:23] every big independent would say that [00:07:24][1.6]

Bryce: [00:07:24] like. Yeah, but today I think [00:07:26][1.8]

Alec: [00:07:27] surely no one's saying our strategy is to be number two. [00:07:29][2.2]

Bryce: [00:07:30] I'm saying this strategy would be to just be bought out, exit cash and just [00:07:33][3.8]

Alec: [00:07:34] such a capital as they do this for the love of the Bryce unliveable. Also, do you put it as your strategy? Like our strategy is to get bought out within the next three years? [00:07:46][12.5]

Bryce: [00:07:47] Yeah, sure. I just want to know what you're sure you like. [00:07:49][2.3]

Alec: [00:07:49] Our strategy is to be number one. Wink, wink, nudge, nudge. Then we'll get bought out like that subtests, make [00:07:54][5.3]

Bryce: [00:07:55] it transparent, make it transparent. [00:07:56][1.2]

Alec: [00:07:57] Right. I'm saying these guys aren't going to sell out. They love that strip of ocean [00:08:00][3.3]

Bryce: [00:08:01] in Western Australia. They've got to Redfern microbrewery. Interesting. [00:08:05][4.0]

Alec: [00:08:05] Yeah. Well, let's check it out. Let's get to that in a second. To your point around, if they were looking to sell out, you would much rather sell a business which had some really strong craft brands that then had brand equity, that you could then get a higher value rather than just being a big contract brewer. Yeah, well, you know, endeavoured drinks might say, why would we buy them? Let's just build our own factory. So I think to your cynical way of looking at the world, if every small company just wants to be bought out by a larger company, then this is the right strategy to do that. It's also the right strategy to grow their margins and grow their business and continue to be an independent brewer. So I think either way, it's probably a smart strategy. You mentioned the micro pub. Yeah. [00:08:51][45.7]

Bryce: [00:08:51] Micro Microbrewery in Redfern. So good to know they're actually coming across this site. I just really want to try this because I have I'm [00:08:58][6.2]

Alec: [00:08:58] pretty sure they distribute it on the East Coast. [00:08:59][1.6]

Bryce: [00:09:00] I just haven't seen, I think, out of the bottle afterwards. Yeah, I think the only one I've seen is that no one beer single in the bottle. [00:09:07][7.3]

Alec: [00:09:08] I haven't I haven't heard that one. And we digress. Yeah. So it looks like what they're doing with the with the brewery is focussing on this atomic beer label. Yeah. It seems like a smart decision in terms of like a marketing and engagement and brand awareness thing. I can't imagine that microbreweries are highly profitable. But yeah, I think it would be cool. We should do some research and go check it out. [00:09:32][23.7]

Bryce: [00:09:32] OK, Ren. So we need to go and drink some beers to do some testing. We do. But from a financial standpoint, let's move into that. So market cap of one hundred million. So certainly on the rise. [00:09:45][13.2]

Alec: [00:09:46] Yes, well, not quite on the rise. I think its share price has been relatively flat this year. Yeah. [00:09:52][6.0]

Bryce: [00:09:52] Topped out I think in February this year at 12 cents and is now back down to eight and a half [00:10:00][7.7]

Alec: [00:10:01] and a half. [00:10:01][0.5]

Bryce: [00:10:01] Yeah. So bitter downward movement there. But from a revenue point of view, Ren, we've seen that revenue from activities last financial year ending June 30 is up 20 percent to thirty nine million, which is pretty impressive for for a brewery firm. Profit from that net profit is up twenty eight percent to two point six million. [00:10:22][20.8]

Alec: [00:10:23] Yes. Now, this is probably a good point to talk about the impact of acquisitions, because this is the first year that this mezzos acquisition was factored in. Yeah. Now, it doesn't actually look like the the numbers were affected too much. They made thirty three million last year and they made thirty nine million this year. But it would be interesting to know what the split of that is, that the difference is between organic growth and acquisition growth. Yeah. Right. [00:10:53][29.9]

Bryce: [00:10:53] So Gaige Brands has grown. Yeah. The main main ones growing. [00:10:58][4.6]

Alec: [00:10:58] Twenty three percent in terms of the volume of. Yeah. [00:11:01][3.2]

Bryce: [00:11:02] Yeah. Litas so they've sold more beer in a declining market. I understand Ren beer is actually on the decline generally speaking. So they've done well to grow volume. In terms, of course, Mazza is not going to appear there because they've only just to qualify. [00:11:17][15.1]

Alec: [00:11:17] Yeah, yeah. So it's gone from zero to one point six million light and [00:11:21][3.5]

Bryce: [00:11:21] 5.2 million litres of beer sold for Gaige Roads Brands. Yeah, 2019. Wow. It's a lot of beer. [00:11:28][7.0]

Alec: [00:11:29] Yes. Yeah. Equity Mates, so you can say that the total number of beer that it sold went from eleven point nine million litres to 12 million litres, so barely moved, but its profitability jumped 28 percent. And the reason that the ladies barely moved but its profitability jumped so much is because when you're selling your own brand, rather than doing contracted volumes because contracted volumes fell and their own brand increased, the margin is just better on that. Yeah. So I think that that's the big thing to take away. If you're looking at this company and you're valuing its metrics, a big thing to think about is its sales mix. Because, I mean, this is the same with any supplier in terms of that supply. Supermarkets or liquor stores these days is that all sales are not created equal and some are a lot more profitable than others. [00:12:21][53.0]

Bryce: [00:12:22] Surprisingly as well. Where they're selling has had a bit of a change on FCI 18. So national chains, I'm assuming that's your little and stands still remains is their number one channel for distribution. Three million ladies go through there. But then independent retailers, two point four million ladies have been sold through those guys. I'm assuming that's Joe Bloggs Photoshop on the corner and then tap beer draught. One point three million ladies have gone through there, an increase on last year as well. So getting that sales channel is pretty important for them by the looks of things. [00:12:55][32.9]

Alec: [00:12:55] Yeah, they've also got the the exclusive contract to Opta Stadium, the new stadium in Perth. Not bad. Yeah, yeah. I think they did a million litres through that stadium last year. So any West Coast Eagles are frio supporters or Australian cricket fans or whatever else they do at that stadium. If you want to invest in roads, go support your investment and have a few beers at the footy. [00:13:18][22.3]

Bryce: [00:13:18] You probably don't get a choice. That's the beer on tap. [00:13:20][2.0]

Alec: [00:13:20] True, you don't have to drink when you watch the footy. Bryce. I know you think [00:13:24][3.8]

Bryce: [00:13:27] it falls within the consumer staples sector on in the market. It's price to earnings. If we start looking at valuation is coming in at twenty eight point three. So reasonably high. However, the sector is twenty four point one, so a little overpriced relative to some of its competitors in the industry. But obviously all of its competitors within the consumer staples industry are not going to be microbreweries and of the like. So there's going to be a whole mix of companies in there. So comparing it that way might not be the best way to compare its valuation. Yeah, you're going to move to DCF Ren. Yeah. [00:14:00][32.4]

Alec: [00:14:00] So if we have a look at trying to do a discount cash flow and we start with its earnings per share, which is fractions of a cent, so point to six cents per share, and we say, look, even though it grew at twenty eight percent this year, I think that's ambitious. So if we say over the next 10 years it'll grow at an average of 10 percent a year after that, it will just grow at inflation, although Bryce is hoping it gets acquired. And then we always use the same discount rate for this, the rate that Warren Buffett and Roger Montgomery both recommend. So we just use a 10 percent discount rate. So if we plug those numbers in, what we get is a price of four cents per share, which is below the eight and a half cents that it's currently trading at. If you were to reverse it and say, let's use those numbers, let's use the 10 percent discount rate, it's current earnings per share. And we say, what is the stock telling us that it needs to achieve in terms of a growth rate over the next two years to justify that share price? What we say is that the number is about twenty one percent a year. So, you know, that's sort of in line with what they did this year. But sustaining that growth rate for ten years is probably unrealistic. [00:15:13][73.2]

Bryce: [00:15:14] Yeah, I think the tough thing is the market at the moment, we know that alcohol consumption is going down, [00:15:19][4.6]

Alec: [00:15:19] but still, like even even beer consumption was flat. It's such a competitive market because they compete with all these big brands and like shelf space is so difficult to get. And tap space at pubs is so difficult to get 20 percent a year. I mean, it's a relatively small base compared to some of the bigger breweries. [00:15:37][18.3]

Bryce: [00:15:38] But let's say five percent growth year on year is still interesting. Well, as I said, I'd be going for the exit, go for the sell. [00:15:46][8.6]

Alec: [00:15:47] So if we if we do the other valuation method that we've been talking about, this one that Roger Montgomery wrote about in his book, which really looks at the company's book value per share and it looks at how it's growing through its return on equity. No, what we say is that its current book value per share is five cents and its return on equity. If we average out the last five years, it's pretty low. It's four point four point eighty six percent. So that's not really great at all. If you plug those numbers into the table that Montgomery includes in his book, you get a suggested share price of one point eighty nine cents, which is well below what the what it's trading significantly. Yeah. And the reason for that is because. Was the return on equity is so low, it's just not really good enough. Yeah, but, you know, if it starts crushing it with its own brand and improves its margins and it improves its return on equity, then there's no reason to say that can't change. But just based on historical performance, it's probably not there. There's one last thing that I want to call out in terms of a red flag. It currently has no debt, which is great. It cleared all its debt, I think two years ago at 17, it had some debt no longer Stoate. That's great. There is a red flag buried in that though. You know, it's done acquisitions over the last couple of years. It's built in new canning facility for I think like seven point eight dollars million or something. [00:17:09][81.9]

Bryce: [00:17:09] Redfern Brewery. [00:17:10][0.6]

Alec: [00:17:11] Yeah, there's there's money being spent and so you have to ask if it's got no debt, they just have heaps of cash, but it doesn't look like it's been making that much profit to be able to invest in all that. And so what you say, if you look at its total number of shares, is that that number has just ballooned. So June 2015, the end of a 15 four hundred and eighty five million shares by the end of nineteen one point oh six billion shares. Wow. So it's more than doubled its share count in five years. And there's there's a saying that, you know, you hear if you listen to Shark Tank or whatever, that equity is more expensive than debt. Yeah, and that's very true here, because every shareholder, if they didn't participate in the capital raises and didn't buy more shares, every time the company went to the market to ask mom for more money, it meant they got diluted and it meant they you know, if they were earning one four hundred and eighty five millionth of a share of the company and they were entitled to that much of its profits and all that, they're now entitled to one point 006 billion of [00:18:17][66.3]

Bryce: [00:18:17] the they've more than doubled the amount of shares on offer, [00:18:20][2.4]

Alec: [00:18:20] which is more than halved people's ownership stake. [00:18:22][1.9]

Bryce: [00:18:23] So just to be clear, and what you're saying is that instead of taking out debt, which they would generally have to pay back at an interest rate over a period of time, what they've decided to do rather than that is go to the market and offer more shares on issue for people to buy and they'll take on some capital that way. But the reason you're saying it's more expensive is because rather than having to pay debt back, you're actually diluting the cost and also the revenue that is going to be distributed across to everyone at the end of the day. [00:18:51][28.1]

Alec: [00:18:51] Hundred percent. So, you know, it's a decision I made. It's probably not a decision that most companies would make. You would at least have some debt before you went to the market and diluted your shareholders. Yeah, it's an interesting point. Good pick up. Yeah. Yeah. So you got to keep an eye out for things like that. Yeah. Yeah. But I think, you know, it's an interesting company. It's probably not one that I would be interested in at this price. [00:19:13][21.8]

Bryce: [00:19:14] Well, I'm going to be keeping an eye out. They obviously believe that they're underweight in the East Coast market. I'm reading here that they want to target target the East Coast with an additional six million litres coming across here over the next five years. So I'm going to be keeping an eye out to see what their penetration is on on the shelf and across the retailers over here. [00:19:30][16.2]

Alec: [00:19:30] Yeah, and they're going to open more of these microbreweries across the East Coast as well to, I think, try and build their name recognition. Yeah. So if you look at the states like microbreweries have taken off and craft beers have taken off, and there's definitely a virtuous cycle between brands that have good popular microbreweries that people want to go to. And they get to say touch and feel how the beers are made. And, you know, it's a real experiential marketing, I guess. And then that reinforces sales at the bottle. And so if they can replicate that here, then, you know, it's the world's their oyster, I guess. But yeah, there's a lot of competition in the brewing space. To your point earlier, there's declining beer consumption in general. So if you had winds that they're really going to have a tough market. [00:20:19][48.9]

Bryce: [00:20:20] Yeah, if I was to invest in an alcoholic beverage company, I would be looking at spirits rather than beer test. [00:20:27][6.9]

Alec: [00:20:27] Gin has had an unbelievable run. [00:20:29][1.8]

Bryce: [00:20:30] I know. Yeah. Just looking for the next thing. I think it's going to be mesoscale. [00:20:34][4.6]

Alec: [00:20:35] What you could do is you could just hedge your bets and say whatever it is, you know, Constellation Brands or Asahi or someone is probably going to have a big role in it. And just just in the big end of town. Yeah, yeah, yeah. [00:20:48][12.6]

Bryce: [00:20:48] True. I remember telling you about the West winds gin over in Australia, so I'm not sure how it's going, but I do see it in the shops at the moment, unfortunately. But anyway. So why do you think this falls in your circle of confidence? [00:21:01][13.3]

Alec: [00:21:02] I think consumer discretionary consumer staples like all that is right in most people's circles of confidence. Competence. [00:21:08][6.5]

Bryce: [00:21:09] Yeah, not difficult to understand and not difficult to test either. [00:21:12][3.1]

Alec: [00:21:12] No, no. You say it, you touch it, you feel it, you buy it or you don't buy it. And a lot of these products like that's the best determinant if your mates are rocking up to parties with atomic beer or matzos beer like one of those brands and they're enjoying them and they're buying them more, that's a pretty good indication that. We're on to something. Otherwise, if no one's buying them and you don't see them on the shelves when you go to the Bordeleau or the wildly overpriced or whatever it is, that's first hand market research. [00:21:41][28.2]

Bryce: [00:21:41] To give you an example, White Claw is is a spritzed that's gone nuts over in the States at the moment. Crazy. So much so that you and I wanted to try and bring them to us. Yes. [00:21:51][9.6]

Alec: [00:21:51] Yes. It may have been an email that you sent email them. [00:21:55][3.7]

Bryce: [00:21:55] And unfortunately, an international distribution is not currently part of their business strategy, but that's fine. So it led us to look domestically at what are the competitors, I guess, or similar similar products that are in Australia. And I saw that Sofie. So I was doing a three Equity Mates. I feel so fine. So very nice. Sophie Oh, they were doing a raise through equities. So a private raise off market. Anyone can do that, though. It's a crowdsourcing platform. And I figured the first thing that I should do before actually investing is going to taste them. They've got two flavours. Didn't pay them. [00:22:33][37.9]

Alec: [00:22:33] Yeah, they were. Yeah. Average. [00:22:35][1.9]

Bryce: [00:22:36] Yeah. And I don't know if that's because [00:22:37][1.2]

Alec: [00:22:38] Americans have terrible taste for [00:22:39][1.4]

Bryce: [00:22:40] white wine and spirits. [00:22:40][0.8]

Alec: [00:22:41] I'm joking to all of our American listeners out there [00:22:43][2.1]

Bryce: [00:22:45] and so yeah, it didn't pay it. But now I say there's more coming to the market in Australia, so some more testing to do. But yeah, a good example of how easy it is to actually go out there and test these things. [00:22:55][10.0]

Alec: [00:22:56] Maybe we should brew our own. [00:22:56][0.9]

Bryce: [00:22:57] Well, yeah, I guess it's not hard to pull Gurnon a bit of water into it, shake it, shake it up with fibre. [00:23:02][5.2]

Alec: [00:23:03] That's a nightcap every night. [00:23:04][1.1]

Bryce: [00:23:05] Get out of anyway, Reg. We'll leave it there and we'll continue our shallow dive next week. [00:23:11][5.6]

Alec: [00:23:11] Sounds good. [00:23:11][0.0]