By Nicki Bourlioufas – published on Morninstar.com.au on 28 May 2018
The consumption of craft beer and premium whiskey grows in Australia and abroad, barley malt producer GrainCorp (ASX: GNC) has benefited from robust malt sales while some listed brewers have benefited from higher beer sales too.
To help satisfy the craft beer boom, GrainCorp recently bought distribution business Cryer Malt, the largest distributor of craft brewing ingredients in Australia and New Zealand. GrainCorp has expanded its malt distribution network, and has 11 warehouses in North America. The company is now one of the world’s largest malting barley producers.
In its first-half results to 31 March 2018, GrainCorp said its Malt division was performing well, helping to offset a significant reduction in crop production in eastern Australia. “GrainCorp Malt performed solidly in a period when production was curtailed as the existing plant in Pocatello, Idaho (US), was upgraded. We continue to experience good demand from craft beer and distilling customers,” said chief executive officer Mark Palmquist.
The company announced a net profit after tax (NPAT) of $36 million. The group re-confirmed its 2018 full-year earnings guidance of $240 million to $265 million underlying EBITDA and $50 million to $70 million underlying NPAT, with a poor crop season in 2017-18 weighing on its earnings. Its shares are trading at about $7.75, above a six-year low of $7.17.
The US craft beer market has, however, helped to support GrainCorp’s malt sales through “continued good demand for malt and brewing ingredients/products from craft and distilling customers.” This has helped to offset a poor crop season in 2017-18.
Malt sales were down slightly to $534 million in the first half, compared to $538 million a year earlier. Its new malt plant at Pocatello became operational in the fourth quarter of 2017 and will help boost malt production in 2018 to satisfy strong demand for craft beers in the US.
Retail dollar sales of craft beer in the US jumped 8 per cent to an impressive US$26 billion in 2017, and now account for more than 23 per cent of the US$111.4 billion US beer market. That contrasts to an overall slide in beer sales of 1.2 per cent over the same period.
In Australia, the craft beer market isn’t as big. Brett Heffernan, CEO of the Brewers Association of Australia, says the craft beer market comprises about 9 per cent of the total Australian beer market. But Australia produces much of the world’s premium malt that goes into draft beer and single malt whiskey.
“While Australia produces only 3 per cent of the global supply of barley, it is a big producer of higher quality malting barley,” says Heffernan. Craft beer has underpinned a revival in barley demand because it uses twice as much malt as regular beer.
In its broker note after GrainCorp’s May first-half results, Morgans maintains a “hold” recommendation on GrainCorp and an $8.00 price target, citing the potential for another challenging crop season in 2018-19. The broker has previously said growth in the US craft beer market is slowing.
Also reflecting a sombre tone, shares in boutique brewer Broo have been heavily sold off in the last six months and are well below their IPO price of 20 cents in May 2016. The brewer hit a record high of 48 cents in November 2017 on the back of a deal in which its products distributed in China. But its shares have since slumped to 13 cents in recent days.
However, the company is working state by state with liquor retail banner groups on roll-out and in-store presence. Greater consumer awareness and expanded distribution via this channel are expected to increase annual sales volumes of the Broo brands.
Craft brewer Gage Roads Brewing has fared better this year, trading at about 8.5 cents, with its share price well up from a 52-week low of 3 cents. Gage Roads has benefited from a boost in craft beer sales into both the independent retail channel and the on-premises draft channel, which is helping to increase its profit margins, the company recently said.
“The company expects to meet its full-year sales ambitions of at least 11 million litres and is on track to deliver growth in earnings and margins through the shift in sales mix towards higher-margin proprietary brands as the management team delivers on year two of our five-year strategy,” the company said in a February update.
Nicki Bourlioufas is a contributor for Morningstar Australia.