Why beer company Broo Ltd has rocketed 20% today

The shares of Broo Ltd (ASX: BEE) certainly started the week with a bang. Following the announcement of a nationwide distribution deal in China the recently listed beer company rocketed 22% to 41 cents.

According to the release Jinxing Beer Group Co. has agreed to add Broo Premium Lager to its national product portfolio list. This makes Broo the only international label on offer through Jinxing’s distribution network.

The deal is clearly a big win for the company and provides it with access to one of China’s largest distribution networks. This gives Broo a great opportunity to grow its presence in the world’s largest beer market.

Founder and CEO Kent Grogan appears to be extremely optimistic on the company’s future in China. Mr Grogan said: “I am thrilled and humbled by this new development; it is literally a game changer and will dwarf our original sales expectations.”

Whilst this deal could be the start of something big for the company, I wouldn’t be in a rush to buy its shares. Including the circa 470 million shares that have been escrowed and are unable to be sold before July 2019, Broo has a staggering market cap of $250 million based on today’s price.

That’s incredibly expensive for a company that delivered sales of $516,334 in FY 2016, down 28.5% from $722,571 in FY 2015.

In fairness the deal in China could see sales go through the roof. But even so, I highly doubt they will be able to justify such a premium. I would much rather wait for some orders to come rolling in before even considering making an investment.

So for now I would suggest investors avoid Broo. Investors wanting exposure to the China market could consider an investment in Blackmores Limited (ASX: BKL), Bellamy’s Australia Ltd (ASX: BAL), or a2 Milk Company Ltd (Australia) (ASX: A2M) instead.

Each has strong growth prospects and most importantly is available to buy at a reasonable price.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of A2 Milk and Bellamy's Australia. 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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