Australia: United Malt Group expected to experience recovery in FY22 volumes

Demand for beer as summer beckons in the northern hemisphere is expected to lead to a rebound in brewing and allow United Malt Group (UMG) to experience a recovery in volumes into FY22, Finarena reported on May 20.

Vaccination rates in the US and UK are encouraging and weather patterns are expected to support greater demand for beer. Management expects volumes will remain below pre-pandemic levels for the rest of FY21, although since March, volumes have been tracking at around 95% of pre-pandemic levels. Stronger volumes in March also meant first half results were well ahead of guidance.

In the US, consumers appear to be returning to licensed premises for liquor consumption, which supports the company's business, and attendance at summer sport and entertainment is likely to provide more upside.

As a cautionary note Macquarie points out Canada has entered a third wave of coronavirus and exports are likely to be affected by the potential for still-high coronavirus infection rates and lockdowns in Asia.

United Malt is expected to deleverage quickly, although increased utilisation of the Perth kiln could require additional expenditure, albeit the timing is uncertain. Total growth capital expenditure in the first half was A$37.8 mln which included the Scottish distilling expansion. Total expenditure of A$120 mln is expected in FY21, as previously guided.

While a material expansion of distribution volumes would likely require additional malting capacity Credit Suisse points out it would also bring additional volumes and efficiencies.

Underlying first half operating earnings were A$60 mln, 4% ahead of the top end of guidance provided at the company's AGM. Bell Potter assesses upside should be forthcoming if the company's targets prove bankable and anticipates normalised operating earnings for FY21 of A$170-180 mln.

The second half will benefit from a favourable lift in mix and volume, with the main headwinds the stronger Australian dollar and non-recurrence of temporary covid-19 cost mitigation.

United Malt assumes some restrictions remain during the second half. Credit Suisse notes growth in consumption of hard seltzer – carbonated water, cane sugar alcohol and flavouring – has been mentioned as a downside risk but assesses this will take share from mainstream/low-alcohol beer rather than the craft market.

Macquarie was disappointed that cash conversion will not hit the 80% target in FY21 because of the impact of the pandemic as well as a continuation of the capital program in place.

There are also supply chain constraints to consider, with shortages of bottles, aluminium cans and transportation. Container export supply is still difficult in Australia and Canada. Macquarie was also disappointed with the dividend pay-out ratio, which at 45% was below the target of 60%.

Margins were affected by a change of product mix, hygiene and social distancing costs during the half year as well as increased supply chain costs. Operating earnings included a negative impact of -A$13 mln for Grantham, FX and the business transformation.

United Malt is targeting A$30 mln in operating earnings benefits throughout FY22-24 via organisational restructuring, responses to data analytics and process improvements. Wilsons believes the announcement quantifies the opportunity investors have been eagerly anticipating since the demerger. Incremental benefits are expected to be spread evenly across the years.

Macquarie expects upside from pent-up demand, restocking and the transformation program. The main risk envisaged by the broker is a slower recovery in mix-shift and further lockdowns that affect on-premises consumption.

UBS envisages United Malt as a recovery trade with the sources of potential upside such as the northern hemisphere summer driving malt volumes back to pre-pandemic levels.

The market has begun pricing in the improved outlook yet the broker believes valuation is undemanding and earnings visibility is improving, while Credit Suisse downgrades its rating to Neutral because of the rally in the share price yet stays positive regarding the market recovery and the opportunities for expansion.

Morgans upgrades forecasts to reflect the stronger-than-expected first half and continues to forecast a strong recovery into FY22 based on the easing of coronavirus restrictions and around $10m in business transformation benefits.

Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has a Hold rating with a A$4.60 target while Wilsons, also not one of the seven, has an Overweight rating with a A$5.09 target. The database has two Buy ratings and two Hold. The consensus target is A$4.84, suggesting 6.7% upside to the last share price.

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