United Malt Should Benefit from Improving Barley Crops and Normalizing Beer Demand

Business Strategy & Outlook:

United Malt is the fourth-largest global malt producer, with operations in four countries and a diverse range of customers. The business has capacity to process about 1.25 million tons of malt annually, or roughly 5% of the global 23 million tons produced. This capacity primarily serves the U.S. and Canada beer market, with additional facilities in Australia (serving domestic brewing and exports to Asia) and the U.K. (selling to Scotch whisky distillers). The primary use for malt is for brewing beer–more than 90% of demand–and softening beer consumption in the developed world has offset rising intake in emerging markets. However, malt demand has risen at a faster clip over the past several years given the contribution from rising craft beer demand. Craft beers use a greater amount of malt given heavier taste profiles and, in the U.S., the use of adjunct grains such as rice and corn in mainstream light beer recipes. This demand is expected to grow further, albeit at a slower pace given the already high number of craft brewers globally.

The primary raw material cost for malting companies is barley. While any given year’s cost for malting barley will depend heavily on weather conditions in key global growing areas, the expected average cost of barley will track broader inflation, as supply and demand roughly equal in a typical growing year. The malting industry is relatively concentrated. Commercial maltsters–those independent from brewer ownership–control the vast majority of total industry malting capacity, with the top four controlling nearly half of this portion. Brewers make up the bulk of the remaining one quarter of malting capacity, but have also remained rational. Barring a sizable strategic shift, which appears unlikely, brewers are not forecasted to offer substantial competition to the commercial malt industry. United Malt is one of the major commercial maltsters in each of the four countries in which it operates. It ensures a reliable supply of barley, good relationships with key customers, and the ability to pass through costs in periods of higher barley prices.

Financial Strengths:

United Malt is in good financial health. The capital structure is straightforward, and interest coverage is sound. Cash conversion (the ratio of net operating cash flows less capital expenditure, interest and tax to EBITDA) has averaged close to 90% over the two years to fiscal 2020, reflecting its stable earnings profile in a mature industry. United Malt’s capital requirements are lower than other GrainCorp divisions, and the targeted dividend payout ratio is manageable, supported by its cash flows. United Malt’s capital structure is customary for an agribusiness of its nature. It is funded by debt and equity, with debt mostly associated with the funding of inventory and plant, property and equipment. Cash flow and working capital requirements can be volatile due to swings in crop prices, hence a working capital facility is also in place for on-demand debt drawdowns. Debt facilities total above AUD 700 million, and are renewed regularly to align with the business’ seasonal requirements. As at Sept. 30, 2021, the company had AUD 312 million in net debt, representing a 2.1 multiple to EBITDA. United Malt aims to maintain a net debt/EBITDA ratio of 2.0 to 2.5 times–unchanged since its original acquisition by GrainCorp in 2009–but the business’ seasonality and associated working capital requirements mean this target may occasionally be exceeded. United Malt has good coverage over its debt. The forecasted net interest cover (EBIT/net interest expense) to improve to about 9 by fiscal 2024 from the COVID-19-affected 3 in fiscal 2022.

Bulls Say:

Underlying earnings are stable, supported by long- term client contracts and its ability to pass through costs during periods of high barley prices.
United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.

Company Description:

United Malt processes grains into malt, primarily for brewing into beer. The company is the fourth largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast growing craft producers. The business has capacity to process about 1.25 million metric tons of malt annually, primarily housed in the U.S. and Canada, serving the North American beer market, with additional facilities in Australia (serving both domestic brewing and exports to Asia) and the U.K. (selling to Scotch whisky distillers).

(Source: Morningstar)

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