Richard Ivers & Chris Judd: talking a classic ‘uncovered gem’ for Prime Value Emerging Opportunities Fund

Business and investing commentator, Chris Judd, recently interviewed our very own Richard Ivers as part of Judd’s ‘Talk Ya Book’ video series.

Judd “takes people inside the minds of Australia’s brightest investors” to share the thinking behind their stock picking. Richard Ivers’ Prime Value Emerging Opportunities Fund has many success stories to choose from, having being rated the top performer in its category by Morningstar after achieving a 63% return to investors for the year to 31 March 2021.

Richard discussed United Malt Group (UMG), a company in the beer and whisky space, which de-merged from GrainCorp during March 2020.

“GrainCorp was a relatively volatile business as it was exposed to the agricultural cycle, but United Malt Group is a very stable business. When they got together it was thought there might be synergies but that didn’t really play out.

“I think (UMG) is not that well known because of that (the de-merger), and it’s a bit of an uncovered gem if you like.

“As the name suggests, UMG is involved in the malting business. Malted barley is a key ingredient in beer. The company also produces malt for scotch whisky, selling to the UK.”

UMG’s revenues are derived from the USA (60%), the UK (20%), and Australasia (20%). COVID-induced lockdowns have affected the business, but Ivers says it is well-placed for the recovery.

“They’ve had a tough patch, particularly the last six months, because the 30% of revenue that is craft beer – we reckon it’s about double the margin of the commercial beer side. Think of craft brewers that perhaps don’t have bottling facilities so they’re relying on selling kegs into pubs or they have their own beer pubs, and those have been affected with shutdowns.

“They’re about to report their six month results to March and it will be a tough six months, we know that. But in the USA, where 60% of the revenue is, we’re seeing the vaccination rollout and it has been very, very fast. In the US around 40% of the adult population have had a vaccine, and about 20% have had both doses of the vaccine so are fully vaccinated.

“It’s really accelerating, and it’s coming into the key drinking period into summer. So things are tough but we think we may be near the bottom of the cycle for them and that’s what makes it interesting for them right now.”

Ivers sees the secular shift toward craft beers as a tailwind that will continue to benefit UMG, as craft beers often use 2-3 times more malt than commercial beers. “If you put COVID to the side we actually like the business.

“That shift in demand toward craft is a tailwind for them. We reckon they can grow their earnings about five to 10% in a normal environment, just from that structural tailwind, and then they’ve got capital to deploy from the de-merger. It could potentially push sustainable earnings growth above 10%.

“We try to think about where earnings will be post-COVID. They have some expansion plans; they’ve shut one facility in the UK and are opening up another couple of facilities over there and expanding their capacity here in Perth in Australia – there have been a few things going on which should lift earnings above that.

“They’re currently trading on a 15 P/E but the market is trading at around 20 times P/E. So they are trading at a discount, and we would argue that they are a better business than your average in the small cap index.

“It’s a global business. It’s the fourth largest maltster in the world, actually, and the largest in the US.

“It’s one of those opportunities where you can buy a really quality business going through a bit of a tough patch with the upturn on the horizon, and this should drive the share price higher.”

Click here to watch Richard Ivers interview with Chris Judd. 

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