Company Report
Last edited one year ago
PerformanceCommunity EngagementCommunity Endorsement
Performance (60m)
5.2% pa
Followed by
162
Straws
Sort by:
Recent
Content is delayed by one month. Upgrade your membership to unlock all content. Click for membership options.
#Bear Case
stale
Last edited one year ago

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.

#FY22 Q4 Results
stale
Added 2 years ago

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.

#ASX Announcements
stale
Added 2 years ago

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?

9e8ec5879425e15a95738d78373d0c503a2f9b.png

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

#CEO Resignation
stale
Added 2 years ago

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.


#Q4 Results
stale
Last edited 3 years 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.

#Director Buying
stale
Added 3 years 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!

#Bull Case
stale
Added 3 years 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.