More Sober Prospects For United Malt

This story features UNITED MALT GROUP LIMITED. For more info SHARE ANALYSIS: UMG

Despite the benefit from alcohol consumption that comes with having nothing better to do, United Malt still has to negotiate customer failures and freight disruptions. Then there is the severe North American drought

-Significant items, expenses dent United Malt's earnings guidance
-Lower quality result likely yet little amiss with underlying business
-Increasingly tight global barley supply may mean North America imports grain
 

By Eva Brocklehurst

The way out of the pandemic is not straightforward even for United Malt ((UMG)), which has benefited from increased alcohol consumption as swathes of the world's population at various stages over the past year have been limited in what they can do and where they can go.

Importantly, in the company's latest update there appears to be no structural changes in the market and business. Guidance for FY21 (year-end September) is for underlying operating earnings (EBITDA) of $123-128m and underlying net profit of $36-41m.

North America, which accounts for 61% of revenue, and the UK are performing well as these regions benefit from high vaccination rates and the re-opening of venues during the northern hemisphere summer.

Demand for craft beer is gaining momentum, hence, the sales mix has improved. This has produced better margins in the warehouse & distribution business.

Wilsons finds, despite ongoing lockdowns in some regions, re-opening trends in key markets are encouraging, providing both volume growth and a more favourable product mix. Yet, consumption is still being affected in Asia and Australia, being 14% and 7% of revenue, respectively.

There have also been disruptions to ocean freight and cost increases for shipping. The company does not expect a recovery in export sales until freight disruptions ease and restrictions related to the pandemic are lifted.

Macquarie reduces its estimates by -22% to reflect guidance and a slower recovery from the pandemic in Asia and Australia. Wilsons attributes the weaker than expected guidance to higher costs, primarily in relation to the supply chain.

The most important part of the update, as far as Credit Suisse is concerned, is the fact there is no change to the dividend policy for a pay-out of 60% of underlying net profit. As a result, the broker concludes the pressure on cash is not severe.

Significant Items

Significant items have been announced, including -$20-22m in provisions resulting from a UK grain storage contractor going into administration and a bad debt from an Asian customer affected by the pandemic.

The former's situation has also led to a shortfall in inventory for United Malt and the company expects malt volumes to remain at around 95% of pre-pandemic levels to the end of the year.

In addition, software expenses, in line with a recent accounting policy change, will have a negative -$6m impact on operating earnings in FY21, -$10m in FY22 and -$4m in FY23. Macquarie assesses this has partially offset the transformation benefits. United Malt has a target of $30m in transformation benefits by FY24.

On balance, while the level of significant items point to a lower quality result for FY21, UBS finds little amiss with the underlying performance of the business. The opening of the Inverness site has been set back by two months because of delays to construction and should open in July 2022.

Grain Supply

Yet other risks loom as crop conditions in North America have deteriorated because of severe drought, and will affect of the size of the barley crop. This has meant higher barley prices globally.

Wilsons is mindful of an increasingly tight supply position for global barley, which may necessitate North America importing grain, and expects current demand and low inventory will provide a favourable environment for price increases.

United Malt sources barley from multiple regions while its production facilities are located near transport infrastructure, enabling it to spread the risk.

Credit Suisse suggests the extent to which higher logistics costs have been priced into the malt contracts for 2021-22 remains the main variable. Other risks Macquarie points to include any changes to beer consumption, competitive market pressures as well as the procurement of barley.

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has an Overweight rating with a $4.75 target. The database has two Buy ratings and two Hold for United Malt with a consensus target of $4.75 that suggests 7.8% upside to the last share price.

See also, More Beer, Better Outlook For United Malt on May 20, 2021.

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