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$5.23
Average Intrinsic Value
12.5%
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#Q4 Results
Last edited 4 days ago

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.

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##PenfoldsofWhisky
Added 3 weeks ago

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.”

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#ASX Announcements
Last edited 3 weeks ago

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]

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#Director Buying
Added 3 months ago

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!

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#taxrelief
Added 4 months ago

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.

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#Risks
Added 4 months ago

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.

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#Broker/Analyst Views
Added 4 months ago

Moelis Australia: Initiation of coverage: Lark Distilling Co. Ltd (LRK-AU) – BUY – Price: $2.20; Target Price: $2.65

Analyst: Sean Kiriwan, +61 8 6555 8602, sean.kiriwan@moelisaustralia.com

Lark Distilling Co. Ltd (LRK) is a Tasmanian-based producer of craft whisky and gin. LRK’s strong growth outlook (~88% FY20-22e sales CAGR) is expected to be driven by favourable spirit consumption trends, increasing e-commerce penetration and production volume uplift. Initiate coverage with BUY & $2.65 TP

Overview

  • LRK is a Tasmanian-based producer of craft whisky and gin. It operates 2 distilleries (Bothwell & Cambridge) and 2 retail premises (Lark Bar Hobart CBD and Brooke St Pier) in Tasmania.
  • At 31 Dec 2020, LRK had ~818k litres under maturation, with an est. net sales value (after govt. excise) of ~$114m at maturation. LRK is targeting 1,500,000 litres by FY22 (est. net sales value = $209m).*
  • LRK generated $6.4m net revenue in FY20 and a $1.1m EBITDA loss; however, as outlined below, it is on track to double net sales in FY21 which should see it deliver a maiden EBITDA profit in FY21.

Investment summary

  • Strong growth outlook underpinned by: 1) favourable spirit consumption trends; 2) rising e-commerce penetration; and 3) investment in inventory + production volume uplift
    • Premiumisation trend expected to continue to drive consumption of spirits
    • Increasing online penetration: 1H21a e-commerce sales ~5x vs pcp
    • LRK targeting 1.5m litres whisky under maturation by FY22 = est. net sales value of $209m1
    • Flexible sourcing model provides low capital intensity expansion optionality
  • On track to achieve FY21 net revenue guidance of $12m (1H21a: $5.8m) and deliver maiden EBITDA profit in FY21
    • Moelis FY21e net sales $12.2m (+90% vs pcp); FY22e net sales $22.7m (+87% vs pcp)
    • Moelis FY21e EBITDA $1.3m; FY22e EBITDA $5.1m
  • Continued delivery of earnings growth and inventory investment expected to drive valuation re-rate
    • While LRK’s share price is up +55% in last 3 months, LRK still trades on 5.8x Moelis FY22e sales, a -17% discount to its peer average of 7.0x which we view as unwarranted given its strong growth outlook: +88% FY20-22e sales CAGR vs peer average of +20% (+1.0% excluding TSI)
    • Our $2.65/share TP implies 7.0x our FY22e sales (in line with peer average); 31.2x FY22e EBITDA (peer avg: 24.5x) and 17.9x FY23e EBITDA (peer avg: 27.9x; 23.9x excluding TSI)

* Note: Maturation market value based on an estimated future net sales value which is equal to LRK’s historical net sales value achieved.

Click on the link at the top for the full report (which appears to be undated) but was released on Thursday (01-Apr-2021) by the ASX as part of their Equity Research Scheme - which you can sign up for (for free) here.

View Attachment

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#Bull Case
Added 5 months ago

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. 

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#Bull Case
Added 6 months ago

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. 

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#Business overview
stale
Last edited 10 months ago

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.

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#Bull Case
stale
Added 10 months ago

—   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.

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