Why the Gage Roads Brewing Co Limited share price is soaring this week

Shareholders of Gage Roads Brewing Co Limited (ASX: GRB) are rallying higher again today after the brewer announced the renewal of its contract with Pinnacle Liquor Group, a subsidiary of Woolworths Limited (ASX: WOW), yesterday.

The shares have risen 8% today to trade at 5.4 cents, which represents a gain of almost 15% since Friday’s closing price.

The announcement has certainly mitigated one of the key risks faced by Gage Roads and its shareholders as Pinnacle is one of the company’s major customers. It’s a three-year extension of the agreement (with a further two-year option, exercisable by Pinnacle) giving it a minimum volume commitment from financial year 2017 (FY17) through to FY19.

However, it isn’t all good news for the business. The agreement included a stepped reduction of minimum volumes during the period, ranging from 1,000,000 case equivalents in FY17, to 950,000 case equivalents in FY18, and then 850,000 case equivalents in FY19.

Those are only minimums, and Gage can sell more cases if demand is strong enough. While one key risk has now been removed for three years, Gage will now need to prove its ability to remain relevant with consumers over that time.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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