Small Caps | Nov 23 2022
This story features UNITED MALT GROUP LIMITED. For more info SHARE ANALYSIS: UMG
United Malt's FY22 was weak, as expected, but the company has guided to significant earnings growth ahead.
-United Malt delivered a weak full year result, in line with expectations
-The company is confident in a return to growth in the current year
-Signs of positive growth in Canadian and US crops, as well as ongoing demand, should underpin growth outlook
By Danielle Austin
Last week United Malt ((UMG)) reported a weak FY22 result, as expected by analysts given prior guidance.
The company closed out the year with earnings of $92m, in line with guidance for $87-95m. While sales rose 13.9% year-on-year, supported by a higher barley price, earnings declined -24.9% given materially higher costs, including those relating to supply chain and sourcing issues. Net profit declined -66.6% and earnings margins dropped to 6.6% from 10.0%.
The company remains confident in significant earnings recovery over the coming year, although did marginally lower earnings guidance to $132.5-152.5m from $134.0-154.0m. United Malt warns the first quarter will continue to be impacted by pricing issues before contracts roll over with the beginning of the calendar year, thereby creating a second half skew.
According to management at the company, the most significant driver of the earnings recovery will be improvement in North American barley crops, with the company expecting both a higher volume and better quality harvest.
Latest production forecasts have United Malt’s Canadian crops lifting 40.6% on the year prior, and its US crops lifting 49%. Beer demand is expected o be holding up, while premiumisation trends are intact as consumers continue to trade up.
Brokers unsurprised by result, but split on guidance
Two brokers daily monitored by FNArena are equivalent Buy rated on United Malt, with only Morgans Hold rated. These three have an average target price of $3.79, with a range of $3.67 to $3.99.
UBS (Buy, target price $3.70) feels United Malt’s full year result delivered on expectations, following a recent upgrade on the stock from the broker underpinned by its belief that supply-side headwinds are easing while demand remains.
The broker continues to see risk around demand for higher-end craft beer in a softening consumer environment, which could impact on the product mix.
UBS anticipates more than 40% earnings growth in FY23 to be followed up with more than 22% growth in FY24. Lower capital expenditure, alongside utilisation of a new factoring facility and potentially lower barley prices are projected to drive growth.
Similarly rated, Macquarie (Outperform, target price $3.99) believes United Malt has a credible path to earnings recovery in FY23.
Based on more normalised earnings, Morgans (Hold, target price $3.67) finds United Malt worth significantly more than the current share price. However, this broker warns recovery will take some time, and risk remains around whether new management can successfully raise capital to deleverage the balance sheet and take advantage of growth opportunities, despite the company reiterating it will not need to raise additional capital.
Outside of core coverage, United Malt’s net profit result beat projections from both Bell Potter (Buy, target price $4.05) and Wilsons (Market Weight, target price $3.23).
Bell Potter maintains the issues impacting United Malt are seasonal rather than structural, and this broker anticipates a step change in earnings as headwinds unwind. Wilsons is similarly constructive that more favourable contract terms and easing of supply chains can underpin the company’s earnings recovery.
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