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.

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]

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

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.

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. 

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."

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.

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.