My 2 cents on the numbers ...At the moment, there is next to no...

My 2 cents on the numbers ...

At the moment, there is next to no broker coverage of GRB (which is a good thing for those buying early) so there are no consensus estimates to lean on and take comfort when comparing with your own forecasts.

As I see it, the two key variables for this business in terms of forecasting earnings are (1) sales growth and (2) opex per litre.

Based on management forecasts this is perhaps the most operationally leveraged business I have ever come across. This story will play out over the next two + years so to a certain degree you have to have faith that management are going to do what they say they can. Any investment of this nature and in this space of the market requires a bit of a leap of faith. A good way to derisk here is to check out the people running the show and what they have done previously to see if they are up to the task. I think GRB management are - but this is a subjective judgement.

Basically because, according to management, OPEX costs above the EBITDA line (not including COGS) are largely fixed (out to FY15) the greater the sales the greater the profits. Profits dropping to the bottom line in the same way a tasty and cold gage roads brew goes down on a warm day.

Management are forecasting 40 cents per litre on double 2012 production. So thats 40 cents per litre based on production of about 2.4 million cartons.

The company is building production capacity to 3 million cases out to FY15 so there is still a big gap between production and capacity. I wonder why management are building all that extra capacity. I doubt it is so they have some nice shiny machines and equipment sitting idle in the factory to gaze upon affectionately. That said they wouldn't be the first and wont be the last business to overcapitalize on PPE based on overly bullish sales forecasts so this is another area of the business to keep an eye on.

The closer they get to 3 million cases in production (not capacity) then OPEX per litre should by logic fall below 40 cents per litre (unless there is some point along the way where there is a step up in costs requiring further fixed costs expenditure - operationally leverage is not like some never ending magic pudding of course - it has its limits).

Personally I am adopting a more conservative approach and assuming top line sales (or production of cartons) will grow at a CAGR of about 20% pa out to FY15. I know it sounds a little absurd to suggest 3 years of top line growth at 20% pa is being conservative however GRB are in the flow of strong industry currents - namely greater market adoption of craft beer (craft beer share of the overall beer market is expected to double to 4% out to FY15) and also the trend of the retail giants like WOW in pushing their own "home brand" higher margin product. Keeping an eye on the quarterly results and half and full year results will be a way of tracking whether sales are tracking against these forecasts.

Anyway based on this assumption I am coming up with production of about 2.1 million cases and EPS in FY15 of around 1.5cps. This results in a R.O.E of over 30% (dont forget there is a bit of debt in the capital structure in a relative sense so R.O.E will be bumped up a little on that basis).

If GRB get sales up to 2.4 mill, being a CAGR of 25% for sales/carton production, then I get EPS of 1.75 cents. If we assume they get production close to capacity well....

In terms of valuation well, LWB was taken out on a historical PER of 29.3 times. I have looked back over 5 years and they achieved a mean PER of 23 times over that period. In fact during the height of the GFC, LWBs PER dropped to a lowly PER of 15x - and who said aussies love of beer is waning???

LWB is quite a bit of a different business to GRB and my personal view is that the market may not be as willing to pay such a high multiple for GRB. This may prove to be overly conservative. But because LWB was constantly on a very high PER even if you apply a bit of a discount you still have a pretty solid multiple.

Because GRB is at the start of its new business model in terms of growth and profits, and because there arent that many truly comparable listed companies, its a bit hard to postulate what the market may price GRB on. Also to a large degree the market multiple in FY15 will depend to a large degree on the growth outlook beyond FY15. If growth outlook is for GDP growth then obviously the multiple will be a lot lower - maybe closer to 10? If the outlook for craft is still strong, growth is still at 20%+ and there is a real prospect of GRB continuing to expand capacity and perhaps establish an east coast presence then the multiple could be much higher?

My view is the multiple could be anywhere between 13 to 20 times earnings. At EPS of anywhere between 1.4 to 2 cents per share in FY15 you are looking at some pretty decent valuations when compared to todays prices.

As a disclosure I participated in the recent cross trade as well and am obviously interested in this business so bear that in mind when considering my comments. There are of course lots of risks to consider as there are in any business. At the end of the day I like the story and think there is a lot of potential and am willing to take a risk in expectation that GRB will do what they say they are going to do and that the market will reward them for doing so. These are all assumptions that may turn out to be disastrously wrong and only time will tell.

Happy investing.