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Raise your glass for these three stocks

Call it the “master chef” generation, or the growing reach of social media, or simply the increasing sophistication of the Australian palate – but high-end produce is a big growth area. Add to that the desire of people – particularly younger people – to know the provenance of what they consume, and the artisan back-stories behind their favourite food and drink, and you have a rich environment for high-quality products.

That has certainly been the case in the Australian beverage industry in recent years, as the country’s winemakers, brewers and distillers continue to release world-class tipples. While wine and beer need no introduction, the world of spirits has burgeoned in recent years as a new wave of Australian craftspeople prove that the old accepted geographical regional specialisations for various drinks mean nothing.

Spirits are the new wine for the Australian alcohol industry. For the first time ever, according to the September 2021 edition of Roy Morgan Research’s Alcohol Consumption Report, more than one-third of Australian adults, 6,670,000 people (33.4%), now drink spirits.

“The increasing consumption of spirits began well before the pandemic, and if current trends continue there will be more Australians drinking spirits than drinking beer this time next year,” said the research firm.

Australian gins, vodkas and whiskeys continue to win some of the biggest awards in the spirits world. There is a wave of local distillers coming through that have no interest in emulating the famed old-world beverages, but applying an Australian context, with local ingredients. In this fashion, the burgeoning spirits sector shows all the hallmarks of successful growth that Australian wine experienced in its growth from the 1970s.

Spirits’ share of the Australian beverage industry’s total exports has surged from about 5% in 2009 to more than 14% – Australia now exports more than $500 million worth of spirit beverages, and the sector has been earmarked for a major role in the action plan released by industry peak body, the Australian Alcohol Beverages Industry, in 2021 – the 2030 Vision – which projects a doubling of exports.

It’s exciting times for the industry; and the accelerating growth and global recognition of Australian spirit-makers has made its presence felt on the stock exchange – here is a look at the ASX’s small crop of distillers. I think all three can make a case for investment for a patient investor, that can distil the essence of a long-term opportunity (puns intended.)

 

1. Lark Distilling (LRK, $5.02)

Market capitalisation: $368 million

12-month total return: 234.7%

FY22 estimated dividend yield: no dividend expected

Analysts’ consensus valuation: $6.08 (Thomson Reuters, three analysts)

 

Lark Distilling got its start with the establishment of the Lark Distillery by the eponymous Lark family in Hobart in 1992. Listed in 2003, the company went through two stages of different ownership and name before it became Lark Distilling in May 2020.

Lark’s brands include Lark and Nant whisky, Forty Spotted Gin, and handcrafted Tasmanian spirits and liqueurs, such as Quiet Cannon Rum and XO Brandy. Until last year, the company has two distilleries in southern Tasmania, at Coal Valley (Lark) and Bothwell (the Nant distillery), but in October, Lark bought the Pontville Distillery and Estate, located 30 minutes to the north of Hobart, for $40 million, in a deal that was supported by a $53 million capital raising.

Pontville – which Lark was already using as a contract supplier – was a significant buy for the company. It came with 483,000 litres of whisky under maturation, which will lift Lark’s total whisky under maturation by 30 June 2022 to more than two million litres. Pontville will be Lark’s third working distillery in Tasmania, adding 193,000 litres of capacity – taking that to 576,000 litres of whisky a year – but the company is building a new one-million-litre distillery on the Pontville site. When commissioned in mid-2023, Lark will have annual production capacity of more than 1.3 million litres – more than four times what it had in 2020.

Pontville also includes a working cooperage – which gives Lark vertical integration it has not had before – and eight bond stores: this gives lark four separate bond-store locations, greatly reducing its fire risk.

Most importantly, Pontville changes the profile of the company’s litres under maturation, with 29% of the acquired liquid available for sale in FY22 and FY23; this will allow Lark to kick-off its long-planned (announced in 2019) export strategy – which has been delayed by whisky availability – sooner than expected. Exports should now be able to begin in FY23.

Lark believes that all the factors are in place for a successful move into export: the global whisky market is growing at 8% a year; driven by the continuing “premiumisation” of all alcoholic beverages, the proliferation of high-end whisky bars, and the fact that whisky is attracting new consumers from more diverse demographic segments – particularly women. With a swag of prestigious global awards, the company says it “punches above its weight” in the global whisky market, justifying a significant investment in an export strategy built on the high-quality “clean and green” provenance of its Tasmanian whisky. Lark managing director Geoff Bainbridge is on-record saying that the company wants to be considered “the Penfolds of Australian whisky”.

Despite the challenges of the pandemic, Lark doubled net sales revenue (revenue after excise) in FY21 to $12.9 million, with its gross margin improving by 5.1 percentage points to 67%, and pre-tax profit improving to $1.05 million from a loss of $1.3 million in FY20. (After a tax benefit of $2.4 million, net profit came in at $3.4 million, after a loss of $1.3 million in FY20).

The company’s litres of whisky maturing rose by 61%, to 1.2 million litres, with a value of $267 million, up 150%. Subject to COVID, the company expects net sales revenue to double again in FY22.

Lark shares had a great year in 2021, cruising from $1.45 at the end of 2020 to $5.18, but analysts believe there is still good upside from current levels, just above $5.

 

Lark Distilling (LRK) over 12 months

Source: nabtrade

 

2. Top Shelf International Holdings (TSI, $1.625)

Market capitalisation: $117 million

12-month total return: –14.1%

FY22 estimated dividend yield: no dividend expected

Analysts’ consensus valuation: $2.32 (Thomson Reuters, five analysts), $2.51 (FN Arena, one analyst)

 

Melbourne-based whisky and vodka distiller Top Shelf International, established in 2014, has had great success with its NED brand of Australian bottled whisky – named after Ned Kelly – and the Grainshaker brand of Australian bottled grain-based vodka (with a product range including Grainshaker Corn, Grainshaker Wheat and Grainshaker Rye), which it has built into what it says are the fastest-growing whisky and vodka brands respectively in Australia.

At its $35 million distillery at Campbellfield in Victoria, the company also makes a range of whisky-based ready-to-drink (RTD) products, and also provides canning, bottling and packaging services to a range of other industry participants.

Top Shelf listed on the ASX in December 2020, raising $47 million through a share issue at $2.21. The shares had a disappointing reception, and have traded below the issue price ever since – with a low of $1.50 last month. But it looks like the tide has turned, with Top Shelf International shares rising to $1.62.

Top Shelf bettered its IPO prospectus forecasts, with FY21 sales doubling to $21 million, an EBITDA (earnings before interest, tax, depreciation and amortisation) loss of $6.1 million and a gross margin of 23.9% all coming in ahead of prospectus numbers. The company had a total net sales value of maturing spirits of $272 million at 30 June 2021; by the end of the September 2021 quarter, that had risen to $290 million. The company has $500 million worth of products that are either in maturation or planned between now and the 2026 financial year.

That figure covers both whisky maturing in oak and the 500,000 agave plants either planted at the company’s Eden Lassie agave farm in north Queensland or in the nursery. Top Shelf is adding a third plank to its spirits business with Australia’s first commercial-scale production of agave spirit products – tequila and mezcal – from Eden Lassie, which will feature an agave distillery and production facility with the capacity to harvest, distil and package more than 1.5 million bottles of agave spirit a year. The state-of-the-art facility will use drone-mounted cameras to track the biomass growth of individual agave plants, which will allow Top Shelf to tailor the weed management and the moisture control to the individual row. It is scheduled to open in mid-2023.

Top Shelf believes it will be entering the agave spirit product market at an opportune time: the tequila/mezcal category grew 32% in 2020 in Australia in moving annual total (MAT) terms, and there are supply constraints into Australia. The same “Australianness” that characterises NED and Grainshaker will be built into the Australian agave product, and the company has high hopes for export markets: tequila/mezcal is the third-largest spirits category in the US, at US$9.4bn ($13bn).

At these prices, some analysts believe the company’s market valuation solely reflects the whisky and vodka brands – with investors effectively getting the tequila potential as a free option. Top Shelf is targeting more than $250 million in annual sales by FY26, with roughly equal contributions of about $100 million each from NED whisky and the impending agave spirit line, and $50 million from Grainshaker vodka. Vodka production can be ramped up quickly as it does not need to mature.

Top Shelf looks like a classic case of using a float that disappointed its subscribers to your advantage, picking it up on the cheap now. The highest price target in the marketplace comes from broker Ord Minnett, which sees Top Shelf achieving $2.51.

 

Top Shelf International Holdings (TSI) over 12 months

Source: nabtrade

 

3. Mighty Craft (MCL, 30 cents)

Market capitalisation: $97 million

12-month total return: –22.2%

FY22 estimated dividend yield: no dividend expected

Analysts’ consensus valuation: 48.6 cents (Thomson Reuters, one analyst) 

 

Mighty Craft describes itself as a “craft drinks accelerator,” building a portfolio of local craft brands by strategically investing in (or buying outright) craft beverage producers and backing these businesses with growth capital, advice and leadership, and industry solutions to maximise brand awareness and accelerate growth and build scale. The business kicked off in craft beer and cider – where it has built its major beer brands such as the Victoria-based Jetty Road and the Queensland-based Slipstream, as well as its wholesale brand Ballistic – but the company has progressively moved into spirits in recent years.

In spirits, the company has the wholly-owned Kangaroo Island Spirits whisky and vodka distillery and venue in South Australia; the 45%-owned Melbourne-based Brogan’s Way gin distillery and venue; the 65%-owned Seven Seasons distillery in Adelaide, maker of the indigenous-themed Green Ant Gin (Mighty Craft’s partner is an indigenous-owned business); and the soon-to-be-launched Hidden Lake in Tasmania (a joint venture between Mighty Craft and noted spirits industry figure Chris Malcolm), which will produce bespoke single-cask Hidden Lake whisky and Devil’s Run blended Tasmanian whisky.

In June 2021, Mighty Craft added to this portfolio with what it calls a “transformational” acquisition, buying the Adelaide Hills Group beverages business for $47 million. This business comprised the Adelaide Hills distillery – and its 78 Degrees whisky and gin brands – as well as The Hills Cider Company and Mismatch Brewing Company, South Australia’s largest independent craft brewer.

The Adelaide Hills Group portfolio boosted Mighty Craft’s spirits production by 121% and lifted beer by 87%. Mighty Craft now produces about 5 million litres of beer and cider (from seven brands), 220,000 bottles of spirits (from five spirits/RTD brands), holds 750 barrels of aged whisky stock, and operates 12 venues.

The company raised $5.8 million in a share placement in October, with the funds mainly earmarked to accelerate the company’s whisky strategy. By 2025, Mighty Craft has posted an ambition to produce 12 million litres of beer and cider a year (from ten to 12 businesses), 500,000 bottles of spirits (from six brands), hold more than 2,000 barrels of aged whisky stock, and operate more than 20 venues. That would take the company’s share of the national craft beer market from 2.3% to 7%, and its share of the national craft spirits market from 3.5% to 14.5%.

This is a big aspiration, and an investor could look at the share price’s 34% decline, from 38 cents when the Adelaide Hills Group purchase was announced, to 25 cents in August 2021, as a sign that the share market was sceptical. But the shares climbed back to 34 cents in December, and currently change hands for 30 cents.

There is great potential for the Mighty Craft portfolio to export products, most particularly from the Kangaroo Island Spirits and Seven Seasons brands. But first thing’s first: investors would probably want to see national distribution of the portfolio expand in a manner that gives them confidence in Mighty Craft’s targets. Investors have to be patient with a stock like Mighty Craft, as it probably won’t be profitable until at least FY23, most likely driven by Kangaroo Island Spirits. But there’s definitely speculative potential in this stock – on the back of its flavoursome portfolio.

 

Mighty Craft (MCL) over 12 months

Source: nabtrade

 

 

James Dunn is a financial journalist. All prices and analysis at 10 January 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.

About the author
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James Dunn , Switzer

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.

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James Dunn

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