Just had a quick read through this AFR article.

As someone who drinks whisky I don't think Lark is a luxury brand. The only whisky brand in Australia that has this "status" in my opinion is Sullivan's Cove. Sullivan's Cove have real pricing power as can be seen by the sales on the secondary markets like the auction sites.

The new CEO of Lark talking about them being a luxury brand does not make it so.

Latest quarterly/4c here

Key thoughts:

Nothing exciting, so just had a run through vs their last report.

Lots of benign contradictions about revenue increases on a "normalised" basis and some margin expansion (67% gross to 68.6% gross) but then increasing costs "mostly due to timing factors" which one would hope they can time better in the future (advertising campaigns).

They do seem to have a sneaky $15m credit facility that they draw on for a few million here and there but seem to pay back quite quickly which I see as a good sign.

September cash balance of $10m to late December cash balance of $9.1m however they do list a few expenses in recruitment which if unreasonable is at least somewhat understandable.

Disc. Held - mostly as a bottom drawer and would be happy to let go on a takeover offer or wait for the product to mature, hoping they lean on the heritage of the business vs the newer Tasmanian whiskey companies that are a dime-a-dozen now.

Further disclaimer, I hardly even drink any alcohol so have no special place in my heart for Lark. Just find it to be an interesting story.

It may have gone unnoticed by the market last week, but the CFO of Lark resigned on Tuesday, which triggered me to sell my entire stake.

I don’t like to read too much into the tea leaves when CFOs resign, but selling on similar news has saved me a few bucks in the past, and there are a couple of things that are troubling me with this one. 

For a start, there’s no immediate replacement, which suggests it came as a surprise. Not to say that it’s a red flag, but it does make me wonder what skeletons might be hiding.

And speaking of skeletons, a new CEO is arriving in May, so it would make sense for him to flush them all out when he starts. Perhaps the departing CFO may have known where a few were hiding...

Beyond that though, I no longer trust management – including whoever the new CFO would be – to follow through with the strategy set out by the ex-CEO Geoff Bainbridge back in 2015. To wit, to SELL the company to a large player like Diageo. 

It’s looking increasingly likely to me now that they’ll pump export numbers to Asia (the incoming CEO is the head of Grants, Asia), with a greater potential to wreck the premium brand via aggressive expansion and, dare I say it, discounting. 

Don’t get me wrong, it could work in a big way, but Lark’s foundation to my eye is all about the ‘myth’ of the brand, which could be damaged if peddled too hard and fast.

I think it’s prudent to wait until a while after the new management team settles in before buying back in. Beyond the possible downturn in discretionary retail spending over the course of this year, let’s see what they flush out and what the new strategy is.

https://www.ozbargain.com.au/node/736893

A seasonal variety is on sale for $199 /500ml. I thought the customer comments regarding Lark’s products was worth sharing, seemed mostly negative with quite a few suggesting it is overpriced.

disc. Not held. Also, I don’t know anything about whiskey.

Noticed they have a display and tasting at David Jones Elizabeth Street store for the last few days.

Lark has announced the appointment of Satya Sharma as their new CEO and they must really want him based on the package:

• $500,000 golden handshake in cash on signing of contract (he gets that paid now even though he isn't starting until 1 May 2023)
• $620,000 Share Rights under the 2022 Employee Share Plan vesting in 12 months
• $675,000 annual salary, inc. super etc.
• Up to $812,500 cash under the STIP (admittedly this is for 'highly superior performance' and under usual conditions he will only be entitled to up to $487,500)
• Up to $975,000 equity under the LTIP subject to share price performance over the next three years

Does that seem a little exey for a company with a $150 million market cap that generated $24 million revenue and a net loss in FY22? Good luck if you can get it I suppose.

[Not held]

I think this is a very solid set of results. The strength is obviously in the pricing, but the weakness has been in the volumes. The investor call really highlighted their emphasis on premium products, but still missing that link with scale, volume and a dependable product.

If we look at volumes, you can see it was around 72k litres. This is well below the potential 113k litres of maturation this year, and my original expectation of around 100k litres.

Even gin hasn't increased - but only now have they recruited a dedicated sales person for their gin. Seems like they are behind the ball in that. But at least they are catching up. They have substantially increased their sales expenses to support the growth. And we have also seen increased hospitality / venue expenses have they have The Still and Pontville Cellar Door coming online in 2H22.

I am not buying too much into the hype of the NSR at $269/L. If they want to scale to 1m litres per year by around the end of the decade, then they are going to need to focus less on the premium and more so on the blended symphonys, classic/casks, etc. And they really need to smash those domestic wholesale and export markets. Otherwise, they won't get the "halo effect" that Laura McBain talks about.

They used to report the asset valuation as the NSR * whisky bank. That would be $569m on today's results. But it's a total furphy. On the other side, the accounting rules are criminal, because that only values the whisky bank based on the cost of production at around $50m.

I prefer to use the liquidation value (what it would be worth if sold today based on the varying maturation profile). And the whisky bank is growing - partly because they aren't selling enough, but also because they produced around 430,000l this year!

I still think the share price is currently offering around a ~10% discount to NTA. Maybe that's fair in the scheme of things, with the risk/reward on offer. But if they execute the sales volume growth partly through expanding their venues, but mainly through expanding wholesale (e.g. a trusted and dependable blended whisky through Dan Murphys) as well as export volumes (not just the premium stuff to high net worth, but special casks etc) then there will be a lot more value in the next five years from their asset base.

I am not phased about their earnings, but you can see my calculations here too.

Howdy Strawfolks.

There's a lot of bulls out there for Lark, so my contributions may not be new. I have also written a lot of details on other platforms, so will just summarise my bull thesis here - and why Lark is my fourth addition to my 10-stock portfolio.

Ice-driven discount for management

Lark was trading at a significant premium to it's net tangible assets (NTA). However, a small error of getting caught smoking ice seems to have been quite destructive to shareholder value. Indeed, the share price is basically down around 50%. Meanwhile, the fundamentals actually continue to improve. The management risk now is that they are unable to find a good CEO, particularly one that has international experience that can drive export growth. I think the discount applied by the market for this situation is too much.

It's a well recognised whisky

I drink whisky, but that's not why I am buying Lark as a company. The reality is that Lark is a very good whisky, with a huge number of awards. Anyone can set up a distillery, but not anyone can get the recognition that Lark has achieved over the past 20 years. This enables it to achieve a price premium. A lot of pundits will say things like "Lark is good, but it's too pricey relative to it's quality" - just look at the comments on their FB advertising campaign, always some dude comparing it to Jim Beam at $60/litre. The quality vs price complaint is probably true, but with small batch distilling, they can find enough people willing to pay $248 per litre of net sales revenue - growing at ~20% CAGR.

Discounted share price compared to net tangible assets

The NTA based on liquidation values of the whisky bank (not potential sales value that they put in their documentation) is ~36% higher on today's current values using a bunch of conservative estimates (see below calculations). Essentially they have 2.1million litres of whisky in the bank at various stages of maturation, which I have estimated is worth $216/l when mature - though currently they are have net sales revenue of $248/l as per the 4Q22 results. The discount to the pricing is because they are selling a lot of special reserves at very high prices, though as they scale up their sales they will go into lower priced export markets (think: airports etc).

However, you are still buying $1 for around 65c at today's price, and my estimate is that the NTA continues to grow. The current market cap of $204m is bolstered by around $20m PPE and $50m in cash in the bank which makes the EV closer to $155m. The value of the whisky is around $208m more using conservative figures.

Earnings potential

I use in my calculations future earnings forecasts based on whisky maturation levels and proposed revenue. They are able to get a higher sales price than I use as mentioned above. But, the volumes have been lower than expected. Essentially, the big risk is that they don't grow the export market quickly enough - for now it's no issue as every litre of whisky they don't sell remains in barrels increasing in value. But in a couple of years if that still is the issue, then they will have stranded assets and will need to discount.

The earnings potential is super good with GP margins of ~60%. I have assumed some margin compression as this comes down from 63% today to 60%, and assumed NSR is only $216 vs current $248. I have also not included earnings from their estates (e.g. the bar in hobart, Pontville estate that hosts wedding functions, etc) - it's included in the NTA but not earnings. This has actually turned around a lot since Covid as Tasmania opens up, and is generated $5m of revs in FY22 prior to Pontville estate opening. My guess is this could be closer to $15m of revs and say $5m EBITDA, which could add another $50m to the valuation (10x EBITDA multiple?).

Risks of pricing, margins and exports

The main risk is that as they seek to scale their volumes, pricing comes down. They will need to sell more to Dan Murphys that have very good pricing power, and through airports for exports that are typically cheaper higher volume channels. This will compress their margins as they expand. I have put below a conservative estimate of the channels and the pricing, and you can see how the export volumes will massively shift things going forward.

Takeover optionality

Lark is trading at a low multiple compared with other luxury brands (think: LVMH, Diagio, etc). Companies that are seeking to expand into spirits and premium products may look to buy Lark, including it's brand, reputation, and whisky bank. They could also simply arb the multiple difference (buy it at 15x and then have it rerated at 25x in their portfolio - a gain of 40% for doing nothing). My guess is that this will require a bid at NTA to take place - about $4.30 based on FY23 forecasts.

Summary:

This is an asset play, whereby I think the assets underpinning the company's valuation will offer a margin of safety. If the company can execute it's expansion plans, then this will be a very cheap entry point. If not, hopefully I don't lose. Potential timeframe is for the next 3-5yrs.

Modelling the NTA:

Modelling the earnings:

Modelling the distribution channels as they expand volume:

I’m still recovering from the infamous ICE smoking incident at Lark, but the worm has possibly turned now; looking at the headline numbers from the last quarter, the company certainly seems to keep delivering solid results.

Net Q4 Sales of $6.8m represents a +72% beat on the PCP, whilst the whisky bank has nearly doubled (due primarily to the Pontville acquisition.) 

Receipts for the full year (unaudited) went from ~$16m in FY21 to $25.3m, about a 60% uptick which is very decent, though not quite the 100% the market might have been expecting at the start of the year. It's a great result after a quarter or two of uncertainly on luxury, discretionary retail in any event. The balance sheet also remains healthy ($26.1m), particularly if they can maintain CF+ status, which they hit this quarter.

A h/t to @DownunderValue here on twitter for highlighting the fact that on-premise seems to have bounced back this quarter. I always assumed hospitality venues were more or less a break-even or loss-leading branding exercise, but it actually looks like this category is performing strongly now that there's a return to some kind of normal.

Of concern to me is still the immediate dive into exports the moment the previous MD left. Geoff had previously been focussed on making sure the right setups were in place before expanding overseas, and even pulled Lark off the shelves virtually everywhere to regain control of the 'premium' brand. 

With McBain now at the helm, I worry that being too aggressive here will hurt the luxury perception of the brand and its market position. Still, things are looking positive so far, and it doesn't appear to be a shotgun strategy... yet. I guess I worry that in an effort to look good short term, McBain might rapidly boost sales overseas and undo all that hard work in cultivating the premium brand here on home soil.

And just a final thought on their logo/brand refresh, which if you go back and look at my first ever straw for Lark, had me very excited. I'm happy to say that my expectations have been exceeded. The 30-year monogram and the new logo/style is nicely understated, whilst retaining the authenticity of the company's roots. It's a thumbs up from me, and looks likely to appeal to a wide, yet discerning audience.

Time to revisit the valuation as well. I have a super aggressive number there at present, based off a takeover premium. I maintain this is almost certainly what will happen, but I might need to reconsider the multiple a buyer will be prepared to pay in this market. Either way, it still looks like excellent value to me at these levels.

Lark Distilling released their June 2022 quarterly report.

Never thought to see Lark Distillery while looking at salmon. Huon is probably not a huge customer but its an interesting sales tactic.

Just visited The Still and Lark Distillery in Hobart. Was good to see the tasting room was pretty busy with a fair few bottle sales in the short period of time I was there.

Equity mates doing a good job here of summarising the case for LRK as a Buffet Cigar Butt of the back the recent CEO debacle:

https://www.instagram.com/p/CeP55oYM57N/?igshid=YmMyMTA2M2Y=

Not that I condone this in what is essentially a bribe to buy votes and seems unfair with whsiky distilling hardly a strategically important business. Never the less Lark appears to be a winner.

Per the AFR:

Woah, federal election finally called! New management coming? Time to panic or will it be ahhhhhht?

This is how I have been thinking about Lark.

The business is still producing award winning product, has a solid and growing asset base, growing revenues, and valuations at below NTA.

On the product, they seem to take medals in pretty much everywhere. This is highly important for product sales in the premium whisky market and linked to the ability to charge the premiums they can.

The Feb acquisition, funded via a $5 capital raise of Shene Estate and the Pontville Distillery added 130KL production, with 480KL of product being matured. For any producer, and Lark is no exception, it takes years to mature the whisky so there is an obvious delay between production and revenue. The acquisition was beneficial in both production and maturation. 

Production has been increased by about 50% and product under maturation by around 25%. The product under maturation has also been balanced with a third becoming available for sale in FY22 and FY23. This should allow the continuation in the upward trajectory of revenue increases.

Unlike Albo, assuming it will be Albo, who apparently is completely unknown, McBain is a known entity. And like a PM the CEO does not run the business alone, indeed in this case the critical team member is Bill Lark and his ability to continue to produce award winning whisky.

Perennial Value Management continue to buy more on market at these levels after the recent fiasco. I wonder if they've actually approached the ex-CEO to buy his stake as a block trade?

I'm still procrastinating on how much damage Geoff might have done to the brand, and how I feel about it not really having an owner/operator type of CEO (Geoff still holds about ~7% of the business) at the helm anymore.

Bill Lark is still there working his magic as ambassador (recent Legacy 20y ads look great), so on the whole I think it's not an issue for the long term success of Lark. Still, execution in the short term here is hard to predict. Geoff was, despite his private life weirdness, doing a wonderful job building the brand.

Announcement here: https://www.asx.com.au/asxpdf/20220324/pdf/457b2lf1cf87n9.pdf

Bull Case

The story behind the CEO’s departure is obviously not great press, but offered a catalyst to seize what appears like a value play with a lot of upside potential. 

Lark had already communicated with the market their search for a new CEO in December, and the noisy exit combined with the shake-up in markets recently resulted in a -25% month in February. The stock is now down 40% from its high at the end of last year. 

This is a 30year old company with some impressive figures on its board and executive team who have a history of delivering results. More importantly, using the FY21 selling price post the acquisition of Pontville, there is $432M of whisky inventory value under maturation. 

If we extrapolate the H1 results for H2 (which granted is optimistic: their guidance is for slightly lower H2), the business is on a PE for 20. That seems mostly reasonable. And we’re all the whisky under maturation as a cherry on top. 

Risks

The biggest risk I see here is execution risk. If the business deteriorates and fails to deliver on their plan of increasing sales through their new channels, they may cap out. Then the inventory will remain inventory and fail to materialise in through cash flow in the future. The mitigation I see to this is the management teams experience. 

@shivrak you've obviously been on top of the Lark story for a long time. Hopefully today's briefing will tell us some more though I doubt it will tell us specifics on why he's leaving. When the announcement came through today I was disappointed as I was a big fan of GB since hearing that Kohler interview I recently posted. I suspect Lark's 12 Point Plan is well and truly in place and will continue to be executed. It would be pretty intrinsic now to the brand and culture of management team and employees. And no doubt tied in with KPIs. Talk of takeovers may take a back seat for a while though. Let's see (glad I haven't bought yet but could turn out to be an even bigger opportunity).

It's been on the cards for a while now, but today's the day Geoff Bainbridge steps down as CEO effective immediately to 'attend to a personal matter'.

Laura McBain – ex-CEO of Bellamy's from 2014-2017 – will step in as interim CEO.

The last couple of presentations have highlighted this change was coming, but I doubt the market will react favourably. Geoff has been instrumental in turning the ship around and getting it set for success in the last few years. He still holds a huge chunk of the company too, so we'll need to watch his substantial holder notices closely from here on in to keep tabs on his confidence in the takeover strategy.

Announcement here.

I’m super unfashionably late to the Lark Party but I’m here now. I went down an Internet rabbit hole early the other morning and stumbled onto a shaky handheld video of someone walking through rows and rows of boxes on conveyor belts piled high with orders about to be shipped. Down one row. Turns. Goes down the next row. Same thing. Box after box. Row after row, above head height. All the boxes labelled “Lark”.

Been trapped down the Lark rabbit hole ever since.

Luke ‘Wini’ was there on ausbiz Jan 13. 11min.50sec in:

https://www.ausbiz.com.au/media/the-call-thursday-13-january?videoId=18529

Alan Kohler did a great interview with “The Fixer” Geoff Bainbridge last year:

https://www.eurekareport.com.au/investment-news/tasmanian-whisky-trailblazer-sets-sights-on-global-glory/150006

Lark is a turnaround that makes me think of Elders and their 8 Point Plan which rationalised and laser focussed the company. Lark has a 12 Point Plan and it seems to be paying off brilliantly. I’m not going to repeat what other more experienced Lark Party goers have already said about the gold maturing in their barrels, the expected doubling of revenues, the $1Billion takeover tipping point, the fact none of Lark’s sales are now through International channels (yet).

All I’m saying is I’m looking past my bourbon bias and now have a taste for Lark.

Lark Distilling was discussed on Ausbiz yesterday and both Luke Winchester and Owen Raszkiewicz suggested it as a buy.

I have had a look under the hood as I know a bit about the whisky industry from days spent in Scotland but was ignorant of the operations in Tasmania.

Lark produces an upmarket single malt whisky and recently acquired Pontville Distillery another Tasmanian producer / distiller. What is interesting about Lark’s business is the value of its produce under maturation. A bit like Penfolds, Lark has “hidden assets” – the value of the products that are maturing.

Lark provides the following information at Q1 FY22: (preacquisition)

Litres under maturation               1.24m

NSV (net sales value) per Litre     $216

Total NSV                                      $267m

Shares outstanding                         63.1m

NSV / share                                     $4.23

Lark acquired the distillery and estate (40m acres) of Pontville for $40m

Following the acquisition, Lark’s numbers increased as follows:

Litres under maturation                 1.72m

Total NSV                                        $372m

Shares outstanding                          74m

NSV / Share                                     $5.02

A $105m increase in NSV plus a 40 acre estate for $40m. However, part of that increase is due to the cache attaching to the Lark brand which means higher prices can be charged than would be the case for Pontville as a standalone distillery.

Projected numbers at the end of FY22:

Litres under maturation                2.02m

NSV                                                $435m

NSV / Share                                    $5.89

Lark’s profit numbers don’t shoot the lights out at the moment. FY21 Revenue was 16.5m (7.4m prior year) and the bottom line was $1m, with no tax charge. Net assets were $50m ($26m of which is inventory). At the end of FY21 the NSV of whisky under maturation was $236m and this will be available for sale as follows:

FY22:  $24.4m,  FY23:  $31.5m,  FY24:  $46.3m,  FY25:  $44.1m, FY26: $53.1m,  FY27: $ 36.8m

These numbers will, of course, increase as current production adds to volumes. One can see a strong growth runway developing.

An important point to bear in mind is that the values placed on these assets presuppose whisky prices in general do not decline and Lark’s premium position remains intact.

All things being equal it seems that Lark should have a bright future and could quite likely be a take over target for bigger premium brands – Pernod Ricard, Diageo, LVMH, etc.

The share price has had a stellar run, closing at $5.50 on Wednesday 20th October – up just over 300% for the year.

For me, the current price is a bit too close to asset value (which is the way I  value this business). I think it is one for the watchlist and to buy on a pullback with a greater margin of safety. 

20-Oct-2021:  Henry Jennings from the "Marcus Today" Newsletter wrote up Lark today - for MT subscribers, you can find it here.  

For those that are not subscribers to Marcus Padley's newsletter, they do offer free trial subscriptions if you want to check it out:

https://marcustoday.com.au/14-day-free-trial/

or  https://marcustoday.com.au/member/webpages/1002_trial-sign-up-1-month.php

Disclosure:  I do not hold LRK.  Wish I did!

The following is the first bit of HJ's write-up, however there is more.  He talks about their management, and what they've done previously, their TAM, the acquisition of Pontville including the cap raising, some history, awards they've won, and why he likes the company, although his closing comments suggest he's not yet a shareholder.

"I would recommend accumulating on any weakness, but it may pay to just have a couple of fingers of scotch to kick off the night."

"Finally, if they give shareholder discounts, I am on board."

$LRK are on fire

1. Great Acquisition
2. Underwritten
3. Barley a discount
4. Directors want $6.4 million worth
5. SPP for the Punters

That is how you do it, Great Management!

Lark Q4 Results

Lark resleased their Q4 results last week, rounding off a breakout year in FY21. They doubled receipts YoY from ~$8m to ~$16m, with Q4 seeing the largest increase to date at over $5m, confirming the strong run-rate heading into FY22. 

Product manufacturing doubled, taking whisky litres under maturation from ~710,000 to about 1.1m, or an increase of just over 50%. Overall the headline numbers are tracking incredibly well.

Management flagged that a large portion of the quarter's production increase was through bulk purchases from production outsourcing and partners, which raises some questions about quality, but one would assume incredibly high standards are being applied here. Something to keep an eye on as they aggresively expand their 'bank' of litres under maturation.

A recent KPMG audit valued this bank at $216/Litre – jumping from about ~$140 earlier in the year – and taking the total net value of the liquid in the region of ~$236m (at point of sale). This value obviously can’t be realised until the point at which the whisky is ready (FY27+), but it does serve as both a good indicator of brand power as the price-per-litre ratio increases, and as a yard stick for potential takeover price tag as the bank increases.

The value at cost figure of only ~$20m indicates just how impressive the gross margins are on the product before expenses. Again, this highlights the increasing price power that the Lark brand seems to be attracting as they leverage their heritage and premium market position on current marketing efforts.

With $11.5m left in cash, a gravity-defying SP, and an appetite to expand their production, it may make sense for a little more dilution in the coming months, however management were ferociously buying on market earlier in the year and have a huge % stake at present so it's not a likely scenario in my eyes.

More likely – as they've flagged in their commentary – is an expansion of the debt facillity from $5m to perhaps $15-20m to push production closer to the magic takeover numbers MD Geoff Bainbridge has previously disclosed. 

Final thought is that they have a new e-commerce site released in the past few weeks which should further increase the portion of total sales from the direct to comsumer channel. In turn, this should help improve net margins even further this year. Something to keep an eye on.

Full announcement here.

Mr Bainbridge has previously said he wants Lark to become the “Penfolds of Australian whisky” and has outlined plans for international distribution in the future.

“We’ll start exporting in 2023,” he said. “[Currently] we don’t have any spare whisky.”

Lark gave an update a few days ago the key point being the value of litres under maturation grew 139% YoY and was expected to increase another 55% by 30 Jun 2022.  It has achieved such amazing growth by driving both the factors that contribute to it i.e. litres under maturation have increased 54% YoY and $ earnt per litre grew 55% YoY (to a pretty tidy $216/litre).

I looked at Lark several times in the past 12 months and it ticked alot of boxes but I kept getting blinded by the fact it doesn't screen well on a DCF because of how the whiskey maturation profile the company provides was phased.  Using tools in a disciplined way is great in theory but it sometimes blinds you to great opportunities.  Despite its run up it's arguably good value still.  At the end of FY20 when the SP was under $1 it's market cap was 63% of the value of litres under maturation.  Having put the runs on the board its SP is currently $4.24, representing a market cap of 114% of the value of litres under maturation but that falls to just 69% if the company achieves its forecast for FY22.  I suspect emotion will overcome good judgement and I just won't be able to hit the 'buy' button on this one, but I also suspect I'll be kicking myself for not having done so in 12 months time.

[Not held - negrettably]

Hard to believe, but more director buying on market @ $2.50 in recent weeks. See here.

Not enough to get too carried away, but gee, to buy on market at these levels after such an amazing run in the past few months is interesting to say the least!

From ABC Insiders this morning - a comment from Andrew Probyn suggesting the Federal Government might be changing the level of tax on whiskey in the upcoming budget.

I've read the recent straws with interest, and agree that Lark has the opportunity to become a brand with the equivalent status of Penfolds in Australia. I know a lot of people who are ordering bottles online, quite frequently. However, I'm concerned that the substantial growth required to turn the company into something that is highly profitable relies on Chinese high-wealth consumers, exposing Lark to the risks associated with the China-Australia bilateral spat. I understand Australian spirits are not yet subject to tariffs, but would imagine they could be added to the list very quickly.

Lark Distillery has a fascinating backstory, a promising brand, and a special place in my family’s history. 

My father has been collecting their single malts since their first commercial release in 1998 and has amassed a collection that is now highly sought after by collectors.

Having followed the story closely for years, it became clear to me after the appointment of Geoff Bainbridge as Managing Director in 2019, coupled with the divestment of Overeem and the end of the disastrous Nant Whisky barrel scheme, that something special was brewing.

Bainbridge has an impressive track record of brand building, most notably as the co-founder of Grill’d, but he’s no stranger to running Liquor brands either. He spent 9 years as MD in charge of Spirits at Fosters Asia, so brings with him an established network he can leverage for large distribution. These same connections give him access to a larger company that might be interested in a takeover at some stage too, which is what I think will happen here longer term.

He has also been doing a lot of on-market buying, most recently 200,00 shares at $1.65 a share, and near a 52-week high. He owns ~16% of the company now, which is no small amount of skin in the game etiher.

But my bull case is primarily focused on their brand. 

Brand

Lark has three brands under their umbrella and all have great commercial potential, but Lark is the one that has me most interested. 

The full history can be read here but suffice to say, Lark Whisky has all the hallmarks of a Penfolds like brand-in-waiting. Of all the Tasmanian distilleries that have popped up over the last decade or so, it’s really the one with a genuine shot at becoming a household name.

Though he no longer runs the company, the founder, Bill Lark, was bold enough to embark on a journey to rekindle the distilling business in Australia almost single handedly. This one thing gives Lark the most precious first-mover advantage, both in terms of provenance/brand, but also in terms of inventories. 

The balance sheet carries their current inventory at about $10-15m or so, but the retail value is much higher, at perhaps $115m. The current market cap at time of writing is about that, putting the business at 1x retail value – but I think the market vastly underestimates the brand value this liquid carries with it.

Design 

The tipping point for me was a recent Twitter post from a colleague at another Design firm (a very highly respected firm in Adelaide) who said, “we had the pleasure of spending part of this week in #Tasmania, exploring the waterfront and getting to know a new client. #Hobart” Accompanied by photos of the distillery. 

This means one of two things. They are either producing a one-off label for a new line or brand (most likely), or rebranding Lark altogether. Either way, this firm produces amazing results, so that alone is enough to get me excited.

This may not seem like much, but hiring this particular firm signals to me that MD Geoff is extremely serious about getting the packaging right for one or all of the brands. This could just be a pet project for a special label, but to me, this signals to me a serious investment in brand – they would not hire this firm otherwise. My guess is that we should see this design work roll out within 3-6 months. 

Value

I think Lark stands on the precipice of tipping into a household name here in Australia, and cementing itself as the premier Whisky brand in Australia. 

Run by a management team with an established track record, impressive revenue growth in the last half, and boasting a sleeping giant of a brand, I think there’s still plenty of value in the current valuation and I would expect it to appreciate over the next 5-10 years into an enormous enterprise, especially if Bainbridge stays on and works his magic. 

Lark released their H1 results yesterday lunch time, which included revenue of $7.5m, a 95% increase to H120 revenue and a 28% increase in QoQ cash receipts. Main highlights to drive growth in H2, include:

- Adding key distributers 
- Continued acceleration of Lark limited release and collab programme 
- New product 'Lark Legacy' to be released in Q3
- New Tasmanian Whisky Bar project
- New stores opening

With a market cap under 90m, the valuation does not seem too demanding and if growth can continue at the same pace there is no reason the share price can't keep climbing higher. 

Lark Distilling Co (ASX:LRK) is a whisky distillery based in Hobart, Australia. The business’ heritage goes back to the 1990’s when Bill Lark (widely considered the father of Australian whisky) began producing Australian single malt whisky, which was released commercially in 1998. Lark currently operates under the Lark, Nant and Forty Spotted Gin brands.

The company underwent a ‘major board brawl’ in May 2019, which resulted in a clearing out of the board including founder Bill Lark and the acting CEO. Since then, David Dearie (ex-CEO of Treasury Wine Estates) has come on as Chairman, Geoff Bainbridge (founder of Grill’d and ex-MD of spirits division at Fosters) has come on as CEO and in May 2020, Laura Bainbridge (ex-CEO of Bellamy’s) came onto the Board as a director. Bill Lark has since returned to the business as a brand ambassador.

The new management have big plans to turn Lark into ‘the Penfolds of Australian whisky’ by embracing the 28-year heritage as the nation’s first craft whisky and ultimately leverage its brand with Asian consumers.

At it’s current share price of $1.39 (September 2020), Lark has a market cap of ~$75m. It has ~$14.5m of cash after recently raising $9m from institutional investors including Ellerston and Regal Funds Management at $1.10, and $5m of debt.

Lark undertook its first ever national advertising campaign for Lark Whisky during FY20, which drove a 34% increase in sales. Lark generated revenue of $7m in FY20 and is guiding for revenue of $12m in FY21 after experiencing strong online demand during the COVID-19 lockdown. It also implemented a direct distribution model (ceasing its mainland distribution agreement). Lark generated gross margins in FY20 of 54% and an overall net loss of $1.3m. Cash flows from operations were ($3.5m) as Lark invested in building up its inventory.

Lark's current strategy is two-fold: (1) build and laydown inventory which will provide sustainable future revenues and profits, and (2) investing in building the Lark brand into a globally recognised and loved Tasmanian whisky icon.

The business currently has approximately 700k litres of whisky under maturation with a market value of just under $100m. Lark is aiming to double this to 1.5m litres by FY22.

The CEO has indicated that they are looking to recommence sales overseas in 2021 and 2022.

—   Established, award-winning brand with long heritage. $100m worth of inventory (whisky barrels) under maturation, will become ready to sell over the next 3-4 years. Aiming to double this inventory (~$200m) by 2022.

—   Strong unit economics. Over the maturation cycle of a barrel of Lark whisky increases in value 7.5x (roughly cost of $2k per barrel with net sales revenue of $15k per barrel).

—   New management with previous experience in Australian food & beverage companies exporting internationally. Strong growth strategy outlined and ready to be executed. Medium/long term will aim to build Asian exports.

—   Forecast revenue growth of almost 100% in FY21 including maiden positive EBITDA result.

—   Enjoyable due diligence process.