Gānbēi! A Toast to China
Recent first half numbers from MOA Group (NZX:MOA) showed that the craft brewer remains on a growth path, with further development of the company’s distribution network in China. That aside, the interim results evidence top-line growth along with margin expansion. Also encouraging is that expenses are being well-managed and increasing at a slower pace to sales growth.
An 18% increase in the company’s share price on 19 December also saw a ‘please explain’ notice from the kiwi stock exchange. The company replied in turn that it had met its continuous disclosure obligations. We suspect some investors are however speculating that Moa will follow the path of fellow Business Bakery stable-mate Trilogy (also covered in this week’s report) which has received a takeover approach from a Chinese suitor. We certainly wouldn’t rule this out for Moa at some point given the company’s progress in China, and with the shares treading some way from the 2013 IPO price of $1.25.
Recap and What’s New?
In our previous coverage of the MOA Group (NZX:MOA) in October 2017 (FAT-AUS-843), we provided an update on the company’s efforts to expand their distribution capacity via alliances with Lewis Road and ParrotDog. We also looked at the company’s record in terms of sales (NZ$ and Litre values) over a four-year period.
In covering the company’s FY17 results we highlighted the effects of their “alliance” strategy which added to the momentum in headline numbers. Another positive was the improvement in gross margins and reduced operating expenses. Despite these developments, the company still recorded a loss of NZ$1.96 million at the EBITDA line, though an improvement on the previous year.
Given that MOA Group ended another fiscal year at a loss, it is unsurprising that the market responded in kind, with the share price dropping away in 2017. However, after bottoming out in mid-December, takeover speculation helped the shares surge over 40% back to over the 0.50s level. Also helping sentiment was an unusually hot start to the New Zealand summer (great time for beer) while the ongoing hops shortage (per the New Zealand Hops cooperative) likely added fuel to the fire.
Over the longer term, we are optimistic that Moa can benefit from an increasing exposure to overseas markets, especially in China (the biggest beer market in the world). Craft Beers are also on the rise in line with higher incomes. On that note, we provide a brief update on the company’s interim results as well as some updates on the opportunities in China.
1H18 Results – comparisons are on a year-on-year (yoy) basis unless otherwise noted.
Starting from the top, MOA (NZX:MOA) reported steady growth with revenues expanding 21.5% to NZ$4.55 million. Moving on down, gross profits were up 28.9% year-on-year to NZ$1.31 million as a result of higher selling prices and increased exposure to higher margin overseas markets. Gross margins have now inched up 50 basis points to 28.9%.
This is likely the aftermath of the company’s acceleration in their China expansion. In fact, CEO Geoff Ross provided a bit of colour with a statement that China is “our most promising export market” and that the company was now “working with new local partners and with our own person in market, we have some very good opportunities.”
As we’ve noted in the previous section, China’s beer market is massive with actual volume data showing consumption of more than 25 billion litres. In fact, data from Euromonitor International, indicates that China consumes double the amount of beer than the second largest beer market in the world which is the US.
In addition, imported beer is also growing at a decent clip up 15.8% year-on-year in 2016 with craft beer being the fastest rising category. According to sector data, craft beer is growing at twice the rate while price per litre is rising at almost triple the pace. Furthermore, beer prices in China this year have been on the rise as mounting cost pressures push beer brewers to raise prices in tandem.
The rise in overall beer prices makes imports like MOA Group’s craft beer more attractive given the relatively stable price of their offerings while boasting higher quality. In light of this, the MOA Group (NZX:MOA) has strengthened their distribution network in China now having access to distribution in new provinces as well as a new supermarket chain. The company has also hired their first staff member in China, a New Zealander who has lived in the country for eight years.
The CEO noted that their first China based team member’s main focus is to build up sales with new distribution partners. Whilst early days, the start has been encouraging, with sales over a 4-month period up over 200% year-on-year on the back of greater access to bars, restaurants and supermarkets in key cities.
Case in point, below are company-provided screenshots of their beer being distributed in Beijing’s Gung Ho! Pizza restaurant. This is one of the higher end establishments which have proven to be quite popular with the middle and higher classes.
Image Credit: MOA Group (NZX:MOA) and Kristen Lum GoingGlobalTV
Naturally, growth doesn’t come without cost and the CEO has provided some additional commentary that though there is some nice momentum building, first-half earnings would be hit by the Chinese investment. This would however be offset by the second-half where the summer months in New Zealand and a bigger contribution in China would significantly improve the annual result.
Source: 30 November 2017 MOA (NZX:MOA) Group Filing
Moving back to the financials, this has led operating expenses to spike up, which have risen year-on-year by 15.8% at NZ$2.79 million. Most of the increase was from increased investment in China. This puts the EBITDA loss up 13.2% year-on-year to NZ$1.29 million. Despite that, operating expenses, as a percentage of sales, has declined from 64.3% to 61.3% as MOA continues to grow the top-line.
Despite the ongoing loss, we believe that management can leverage their growth in China to get closer to profitability. We’ll be keeping a close eye on their progress with management stating that they will be providing updates on summer trading and progress in China in late March.
On the daily chart, the stern upward rally in share price from the mid-December 2017 low of $0.40 to early January high of $0.56 has caused the RSI to weaken from overbought territory (exhaustion of short-term upward momentum). Hence, should the bears emerge over the near term, then a period of downward consolidation could follow. This is not to be unexpected, considering the substantial gain in share price over the past month. Moving forward, and in order for the short-term technical outlook to strengthen, a decisive break above the aforementioned early January high of $0.56 (as marked by the horizontal solid-red line( is required. Should this occur, then further gains are likely to unravel over the medium-term horizon.
With reference to the monthly chart, support was respected at the 78.6% Fibonacci retracement of $0.42 (blue set of retracements) in September 2017. In addition, a bullish doji candlestick formation also formed which is suggestive of an upward change in momentum. For this scenario to be confirmed, a sustained break above the September 2017 high of $0.48 (as shown by the horizontal solid-red line) has come to fruition in December 2017. This favourable type of price-action points to the sell-off since October 2016 to have come to an end. In-turn, gains are likely to follow over the medium-term, with initial resistance sighted at the 38.2% Fibonacci retracement of $0.61 as represented by the thin-red set of retracements.
Summary
Recent first half numbers from MOA showed that the craft brewer remains on a growth path, with further development of the company’s distribution network in China. That aside, the interim results evidence top-line growth along with margin expansion. Also encouraging is that expenses are being well-managed and increasing at a slower pace to sales growth.
An 18% increase in the company’s share price on 19 December also saw a ‘please explain’ notice from the kiwi stock exchange. The company replied in turn that it had met its continuous disclosure obligations. We suspect some investors are however speculating that Moa will follow the path of fellow Business Bakery stable-mate Trilogy (also covered in this week’s report) which has received a takeover approach from a Chinese suitor.
We remain optimistic about MOA’s future with recent results representing a positive movement, targeting profitability by 2018; reflected by growing revenue, widening margins, and a tight lid on expenses. We remain encouraged by the quality of management, rising operational momentum, and believe that profitability is not too far on the horizon as margins and volumes continue to expand.
Of the craft brewers in New Zealand, Moa (NZX:MOA) appears to have the most experienced business team and, being listed, has the ability to raise capital more easily than competitors. Its price point on the supermarket shelf is at the more affordable end of the craft beer market which should assist with growing volumes, and we expect that once the New Zealand business is profitable that management will have a sound footing from which it can focus on growth in international markets.
After a strong jump recently, the share price though likely needs time to consolidate. Accordingly, we have a hold rating on Moa (NZX:MOA).
Disclosure: Interests associated with Fat Prophets declare a holding in Moa (NZX:MOA).
