Why I am buying more shares in Gage Roads

Recent share price weakness led me to do a deeper dive into their past and ultimately buy more shares.  My thinking is outlined below.

I went back through every annual report since they listed and pulled out revenue and NPAT numbers so I could make the following graph. Important note, the FY16 revenue numbers are derived by me simply doubling the first half.  As confirmed by GRB, the second half is traditionally weaker, but it is a close enough assumption for my own purposes.  

Revenue is left axis, NPAT is right axis.



Revenue has grown significantly from about $1M ten years ago to where we are today.  NPAT is showing signs of finally being positive.

Cash flow:  FY15 saw negative free cash flow (FCF), with some commentary in the annual report about paying back suppliers.  The first half of FY16 we see FCF of nearly $1M which coincides with the cash on hand balance going up about $1M.  As an aside I calculated FCF as Net cash inflow - Payments for property, plant and equipment from the HY Statement of Cash Flows.  To be honest I am not 100% sure this is correct, but again for my own purposes it is close enough.

Debt:  Net debt is $7.1M.  They have a $9.7M facility drawn to $9.6M, with $2.5M in the bank.  This facility is with ANZ and is guaranteed by Woolworths.  They have been rolling it over  in the past and should be able to do so in the future.  Now that they are starting to generate FCF, they can start to pay down this debt if they choose.  Debt is not great, but if they are generating $2M of FCF per year now, it should not be a problem either.  The stock would not be this cheap if everything was perfect.  

NTA:  Calculated as 3 cents in the recent HY report.  Have been very few asset write downs in the past few years.  Is this a good thing or bad thing, I have not decided yet.  3 cent NTA seemed realistic.  I did my own calculations, and if I include the deferred tax asset it comes out close to 4 cents.  This is not a tangible asset, so is excluded from the NTA calculation as it should be.  For my own curiosity I wanted to see what it looked like when included.  I'm not an accountant, so I still don't have a solid understanding of how this deferred tax asset will impact future statutory earnings.

Company Outlook:  The Gage Roads branded beer seems to be very good.  I am not living in Australia at the moment, so I can't pop down to the local BWS and give it a try.  HC posters have commented on prominent displays in Woolies controlled channels to market.  I even put out a poll to my Facebook friends in Australia.  Gage beer is good and they are working to sell more of it.  The contract brewing side of the business is facing stiff competition which drives margins down, so the company sensibly is switching their focus to higher margin, proprietary brands.

Management:  I don't have an opinion on management one way or the other.  There is plenty of venom directed at management here on HC, however it seems very petty and without any substance.  Presumably based on past poor performance of the share price.  I did not find evidence to back up the claims that have been made here. When I look at making an investment at today's share price, management is neither a positive nor negative for me as I don't know enough about them.  I phoned the company last week and spoke to the CFO. He was very approachable and was happy to spend close to an hour on the phone with me answering my questions.

At around a 5 cent share price, the risk vs. reward equation for me stacks up to buying more shares.  In order for the price to be this cheap, there are going to be some problems with the company, that should be expected.  Companies where everything is going perfectly have appropriately higher share prices.  Those are not the companies that interest me though.