up 12%?, page-5

I've been watching this one for a while, as i made good money in LWB (which recently got bought out).

It's a pretty easy one to value provided you get your assumptions right. Revenue is pretty easy to forecast and beer brewing is purely a margin game - if these guys can do 20%+ EBIT margins then they're a buy, but if they're sub-20%, they're not a buy.

I'd go about valuing GRB as follows:

- They're telling us they'll do 2.9m cartons by FY15
- Currently they're selling each carton for about $16 (FY12 sales of $19.7m against 1.2m cartons sold)
- The gross margin is fairly stable at around 48%, so a reasonable guess for FY15 gross profit is (2.9m * $16 * 48%) = $22m.

The next step is to figure out their operating costs:

- Opex as as a % of sales is supposed to fall by 50% by FY15 when the new manufacturing equipment is fully operational, so that implies a reduction from its current level of 14% of sales to about 7% of sales
- Occupancy, admin, and sales & marketing costs should be fairly stable, but will grow roughly by inflation
- Employee expenses will probably grow somewhere in between inflation and sales growth, depending on the scalability of operations
- D&A will grow by about 50-75% given they're increasing their PP&E by about that much from FY12 levels

Net-net, depending on your assumptions around growth in employee expenses, they should be operating around a 20% EBIT margin. That implies FY15-16 EBIT of maybe $9m which, given they're currently trading at about $32m EV, puts them on a 3.5x EBIT multiple using FY16 earnings. If you assume this business will trade at 8x EBIT multiple in FY16, that's an annual return around 20%, which is what you'd expect for a business of this risk profile and size.

LWB (which is similar in scale) generated EBIT margins of ~20% by having ~60% gross margins with a higher operating cost base. These guys will have to manage their operating costs well to generate 20% EBIT margins on ~50% gross margins. Fosters, for example, was able to generate enormous 38% EBIT margins as their scale was incredible, but clearly these guys won't be capable of getting near that.

Given the importance of margin to beer brewing, the other thing i'd bear in mind as a potential investor in GRB is the Woolworths relationship. I'd be surprised if Woolies, as GRB's major shareholder, let GRB enjoy substantial margins (given Woolworths is effectively helping GRB generate those margins in the first place by guaranteeing shelf space and reducing marketing costs), so i think the upside in margins is capped. I can't think of too many businesses that come out of a pricing discussion on the right side of Woolies.

Good luck, i'll continue to monitor this one.