Nonetheless, 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. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.
Key Considerations
- Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
- Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
- We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
- Underlying earnings are stable, supported by longterm 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.
- The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
- Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
- The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.
(Source: Morningstar)
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