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Date : 30/04/2021

United Malt Group

ASX :

UMG

Market Cap : $1.28 Billion

Buy

52 Week Range : $3.53 - $5.24

Share Price : $4.42

An excellent stock for the post pandemic world. UMG comes with sheer dominance in its space and lots of growth in its pipeline. We recommend a "Buy"

Company Analysis

United Malt Group (ASX: UMG) is turning out to be an excellent stock for a post-pandemic world. The fourth-largest maltster in the world has been a part of our Growth Portfolio since early March when the stock was trading at its all-time low of $3.61 a share. In just a few weeks, the markets have caught on to the value that this company brings to the table. Today, UMG shares trade at $4.30 a share – representing a 19.11% return to our members. Their narrative is extremely strong and the price has still not caught up with the intrinsic value of United Malt Group – leaving a lot of gains still on the table. Therefore, we figured we shall tell you fellow ASX investors what the tailwinds are for UMG and offer you a chance to notice and pick up an exceptional value stock just in case you missed our earlier report.

What’s so great about UMG?

Well, United Malt Group is the fourth largest commercial maltster in the world. Even if you don’t know anything about beer, you would agree that IF you change any ingredient in beer, the taste would change drastically. This is exactly where UMG has a competitive advantage. The firm has an impressive capacity of more than 1.25Mtpa across 13 processing plants in four global regions – North America (the United States and Canada), Australia, and the United Kingdom. Given how important it is for all beer makers to continue buying ingredients such as barley or malt from the same producers, UMG’s dominance in this market is incredibly strong. They have an extremely sticky customer base that would not jump ship to one of UMG’s competitors. If you thought Coca-Cola drinkers are loyal and wouldn’t dream of Pepsi, UMG is a different animal altogether in the world of beer.

United Malt is operating an international network of 21 warehouses. Their operations are strategically located in key barley growing areas which are nearby transportation infrastructure, providing the company with a certain competitive advantage for the distribution and supply. UMG is indeed a “one-stop-shop” for craft brewers and distillers as they offer malt, hops, yeast, adjuncts, and related products. If you don’t like beer, in addition to the craft beer market, UMG also supplies ingredients to the Scotch whisky sectors.

Rising from the Covid19 Abyss

United Malt has taken the necessary measure to navigate through the economically challenging period when distilleries across the world shut down by ensuring its market positioning and continuously adapting its production facilities and distribution platform to deliver its customers on time and effectively. The company focuses on a high-quality diversified customer base, end-market, and geography. UMG has shown high capabilities of adaptability in its operations to reduce costs aligned to market demands with agile staff redeployment and some limitations of capacity due to lockdowns.

The firm has also raised funds to further strengthen its financial position and is now aligned optimally to not just see out the challenges thrown out by the pandemic, but to thrive as it emerges from it. The largest markets – the USA, Canada, UK, and Australia are all opening up their economies steadily. The vaccine rollout has been fantastic in the USA and UK, and data shows that distilleries and pubs are operating at full capacity. In light of the pandemic restrictions, there has been a new market that has popped up for craft brewers and hence for maltsters – the growing demand for online ordering, pick-up, and delivery of craft beer. This new theme is expected to add to the already growing craft beer market. We think the market has still not recognized the positives that come from having an omnichannel for craft beer sales. While on-premise sales of craft beer were at their peak before the pandemic, the addition of online retail will only boost demand and growth for beer – and eventually, also bleed into the price for barley and other malts.

Directors love the theme and are topping up

In addition to our bullish sentiment on United Malt Group, directors have continued to top-up their holdings. If you don’t own shares yet, well, now you have both – analysts and the company’s directors themselves saying the stock price is yet to catch up to its value. UMG’s CEO and Managing Director – Mark Palmquist, Chairman Graham John Bradley, and three other directors have added to their holdings this year. Ellerston Capital, one of the largest shareholders at UMG added over 3 million shares in 2021 via an open market acquisition.

UMG Dominance to Continue

Although there are many smaller players in the malting industry, very few maltsters have the required scale to service national brewers and the ever-changing requirements of craft brewers. Approximately three-quarters of global malt capacity is owned by commercial maltsters with the four largest (UMG, Boortmalt, Malteries Soufflet, and Malteurop) accounting for around 35% of global production.

UMG plans to continue to maintain a strong balance sheet to sustain through the challenge ahead of FY21. The company is assessing acquisitive growth opportunities to expand its geographic reach and product offering and accommodate its customer base.

Looking forward to FY21, United Malt plans to grow along with three main high-value markets, the expansion of the distribution presence in Mexico (1), the Scottish distilling expansion (2), and the replacement of Perth Kiln and development with further capital investment. UMG plans to invest during FY21, GBP 51 million (A$ 91 million) in United Malt’s Scottish malting facilities to increase its capacity by 79ktpa across an upgrade and expansion of the Arbroath facility and Inverness new malting plant.

Our initial report consists of a thorough analysis of UMG, and can be accessed by clicking here.

The Verdict

Extremely sticky client base with long-term contracts, rising demand for craft beer across the world, efficient operations with strategically positioned assets will enable United Malt Group to kick on and recover from the challenges of the pandemic. Expansion and growth plans are in the works and they should deliver both – organically and via acquisitions. Strong financials will underpin the growth strategy in place. With directors and management topping up their holdings, our narrative is that much more reassuring. We reiterate our “Buy” rating on United Malt Group with shares set to outperform the benchmark index.

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