Brewing company Gage Roads Brewing Co Limited (ASX: GRB) has been one of the best performing small caps on the ASX over the last 12 months.
Since this time last year, the company's share price has surged a whopping 193%. And a big part of that price increase has come in just the last few months – since the beginning of May the company's share price is up over 70%.
So what is Gage Roads, and should you think about investing in the company?
Located outside Fremantle in Western Australia, Gage Roads is one of the largest craft beer brewers in Australia. It produces a range of different pale ales as well as a cider. The company has benefited from increased hipster demand for craft beer varieties, with sales for the half year ended 31 December 2018 reaching $13.8 million.
Gage Roads is pursuing a 5-year proprietary brand strategy which it hopes will increase gross profit margins to 70% by FY21.
However, the June FY18 acquisition of WA-based Matso's Broome Brewery alters this strategy slightly. Gage Roads now hopes that it can leverage its existing distribution channels and marketing team to deliver greater sales growth for the newly combined Gage Roads/Matso's brand portfolio at low integration costs.
Even despite the acquisition of Matso's, Gage Roads had a busy FY18.
It won a number of key contracts which it hoped would increase market penetration for its proprietary brands.
In September 2017, Gage Roads entered into an agreement with Optus Stadium and Stadium Park in WA to be the exclusive supplier of beer and cider at sporting and entertainment events held there.
Then in May the company announced it was partnering with Cricket Victoria, securing the rights to supply its beer and cider at Cricket Victoria's official functions and events as well as at Junction Oval.
And just this month it also announced it had won a tender as the exclusive supplier of beer and cider to WA's nib Stadium.
Gage Road admitted that pursuing this stadium strategy – at least in relation to its contract with Optus Stadium and Stadium Park – probably won't have a material impact on the company's earnings.
Depending on crowd size, the revenue from beer and cider sales only just offsets the annual rights fees, volume rebates and sponsorship fees it has to pay to the operators of the stadium. However, increasing brand awareness should have flow-on impacts to other more lucrative sales channels, such as national retail chains and draught sales.
And the company has seen some evidence that this strategy is bearing fruit: unaudited EBITDA was $4.5 million for FY18, which represents an increase of 28% against underlying FY17 EBITDA (after adjusting for $1 million of non-recurring other income).
This flurry of company activity has also benefited its share price. The market has responded positively to these regular announcements of new deals and strategic partnerships by rapidly inflating the price of Gage Road shares.
But this might have pushed it into overvalued territory: based on its mid-year results and a current market cap of close to $137 million, the company is trading at a multiple of over 130x earnings.
This makes it pretty expensive relative to other larger ASX-listed liquor merchants like Australian Vintage Limited (ASX: AVG) and Treasury Wine Estates Ltd (ASX: TWE) which trade at 22x earnings and 37x earnings respectively.
Although this might not be an entirely fair comparison – it could easily be argued that different market factors fuel demand for wine versus craft beer.
Gage Roads is generating more progress than fellow small-cap brewing company Broo Ltd (ASX: BEE), which has seen its share price drop by almost 50% this calendar year.
Foolish takeaway
I would think that Gage Roads only qualifies as a speculative investment right now, although it is making good progress at expanding awareness of its brand through exciting partnerships. The larger product portfolio delivered through its acquisition of Matso's unlocks potentially greater revenues, but it will be interesting to see how the company integrates this into its messaging around building proprietary brand sales.
All in all, Gage Roads is an exciting company that taps into the current rising consumer demand for craft beer – but it will need to prove itself a little more before it becomes investment grade.
