Building Bridges
Kiwi listed Craft Brewer, Moa Group (NZX:MOA) is starting off the new fiscal year ready to pounce, with the launch of a new joint sales venture with Constellation Brands to replace its sales arrangement with ParrotDog which ended last November. FY18 numbers were weaker as a result, though the company did make headway into China while ramping up investments in the region.
What’s new?
In our last coverage of the brewer back in January, we took a look at the company’s First Half 2018 (1H18) results which showed steady progress in growing the top line, and headway in China. Moa continues to report operating losses, but we believe that management’s efforts in China will be rewarded over the longer term considering the country’s rising incomes and shifting tastes towards craft beet.
We also noted that CEO, Geoff Ross, provided some form of guidance (no explicit numbers) that the 2H18 performance would offset the 1H18 loss due to increased investment in China. This followed a seasonally better period in New Zealand and China operations making a larger contribution.
Since our last review there has been the promised summer trading update and the subsequent Full Year 2018 results.
On that note, in 30 April 2018 the company announced that it is expanding its sales channel with the launch of a new company called MoBev. This is in a Joint Sales Venture (JV) between the Moa Group and Constellation Brands which manufactures wine brands such as Kim Crawford, Selaks and Nobilo.
Pictured below is Moa CEO Geoff Ross (Left) and Constellation President Simon Towns (Right):
Image Credit: Review Publishing Co. Ltd.
The JV between the two companies will create economics of scale in terms of distribution. MoBev will specialise entirely in distribution and offer a multi beverage portfolio across multiple sales channels without the trappings of manufacturing. MoBev will initially focus in the New Zealand market and later branch out to Australia.
We find this development as a significant plus considering that Moa Group (NZX:MOA) does expend substantial amount of resources outside production just to bring beverages to market. Freeing up management attention from sales and distribution will help the company focus on improving product and cutting excess fat from the business. The company also did end its distribution agreement with ParrotDog in November 2017 thus this new channel would effectively fill the gap.
MoBev commenced operations last week, and is headquartered at the Constellation Brands’ West Auckland office, with the new sales team charged with selling “all brands from both companies’ portfolios”.
That aside, Moa (NZX:MOA) also revealed that as at end of FY2017 it is now ranked in the top 3 in the NZ craft beer market by market share, with solid growth in the supermarket channel (+10% yoy). There have also been some executive changes with the hiring of Stephen Smith, a former Marketing Director of Lion Breweries and CEO of 1 Above, as Strategy Director. Mr Smith will take over the marketing role from CEO Geoff Ross.
Moving on from those updates, we turn our attention to the company’s annual results
FY18 Results Review
Starting from the top and revenues for the entire year expanded marginally, up 2% year-on-year to NZ$10.45 million. The muted result for the year reflects the much weaker 2H18 performance which reported a sales decline of 9.2% year-on-year to NZ$5.9 million. We believe this drop mainly reflected the end of the ParrotDog sales agreement as it sought to develop its own internal sales force. In fact, the CEO acknowledges this with the statement that “Growth slowed as a result of exiting the distribution arrangement with another craft brand”.
We do admit that the 2H18 performance left us rather in want considering that the company has consistently delivered growth over its recent history while making solid inroads in China. Nevertheless, we view it mainly as growing pains as the company is making a short-term trade-off for long-term gain (MoBev).
Source: Moa Group (NZX:MOA) 30 May 2018 Company Filing
That said, the company did achieve some highlights within the year and having secured the top 3rd spot by market share in NZ’s craft beer market. That aside, management also announced the signing of a distribution agreement with a partner in China – the world’s fastest growing market for craft beer – including a clause where the partner will invest in a Moa Specialist sales force.
The new product launches: The Milk Chocolate Stout (Collaboration with Lewis Road), New Station IPA, Dry Hopped Pilsner and the larger 500ml bottle range, has been well received. Management notes that they’re making steady progress in China, though explicit numbers weren’t provided in the filing.
Gross profits, however, declined slightly year-on-year by 1.7% to circa NZ$3 million mainly due to higher sales costs. We believe this is attributable to a sales mix in favour of higher cost beers and a rise in input costs.
Expenses expanded at a slightly faster pace of 3.1% year-on-year to NZ$5.53 million with distribution expenses being the largest detractor, rising 19.4% year-on-year or by NZ$190,000. In fact, almost all of the uptick in expenses were caused by this and only to be largely offset by management’s cost cutting, and reduction in Administration costs (-1.4% yoy) of NZ$1.98 million.
Management explains that the rise in Distribution costs were mainly due to the ongoing investments in China to expand the sales network. Management also reports that they’ve ramped up brewing capacity to match the rising demand for both Domestic and Export markets.
All in all, the company reported a Net Loss of NZ$2.548 million, up 8.3% year-on-year while the Net Loss Per Share was up a smaller 2.2% year-on-year to NZ4.7 cents due to the recent capital raising.
Despite the ongoing loss, we continue to believe that management can leverage their growth in China to get closer to profitability while the new Joint Venture with Constellation Brands should be a driver for the company’s growth domestically. We’ll continue to keep a close eye on their progress in China and the JV going forward.
Capital Raising
Management also noted that they plan to raise a further NZ$1.92 million, issuing some 3.73 million shares at a price of NZ51.32 cents a share.
The investors include CEO Geoff Ross and Managing Director David Poole as well as prominent US investor Rich Frank. The new capital will mainly be used to fund growth in China as well as fund working capital.
The company also allow a placement via a share purchase plan (SPP) with eligible investors able to purchase up to NZ$15,000 worth of shares. Though the details have yet to be disclosed, we will monitor for updates in this arena before we give out our verdict.
CEO Geoff Ross also had this to say regarding the capital raising: “We are well positioned for the next stage in our evolution. Our strong domestic market position, recent growth in China and sales partnership with Constellation reflect the strength of the brand and our products. With the additional capital raised today we will be able to accelerate our growth and take the business to the next level.”
Summary
Moa (NZX:MOA) reported its FY18 numbers which showed a weaker 2H18 due to the end of its sales agreement though the company did make headway into China while ramping up investments in the region.
Going forward, we remain optimistic about MOA’s future in light of the new joint venture with Constellation Brands. We expect that management will be able to grow revenues, widen margins, and keep 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.
Accordingly, we retain our HOLD rating on Moa (NZX:MOA).
