BrewDog – Can’t Recommend A Purchase!
THE human race, to which, as G K Chesterton said, so many of his readers belonged, turns out to have rights of all sorts and one of them may be the right not to be stuffed with a dodgy investment.
A lifetime ago I used to work in the City and during that life it was the high-minded people at HSBC who tightened their rules about share-tipping and decided there would henceforth be as many “sell” as “buy” recommendations and the bank would put its money where its mouth was.
The HSBC two-tone scale came as a shock at the time to the old-fashioned brokers in London, who believed that their own graduated scale of share tips was far more sensitive, when fully understood.
Thus, below “buy” came “buy on weakness”, which meant “don’t buy”, “accumulate” (meant there was no market in the stock) and “long-term hold” (meant we are brokers to the company). Then came “hold” (i.e. we can’t remember why we bought them) and “weak hold” (meant please hold them until we get out of them). “Avoid” meant “going bust” and was rare. “Sell” was rarer still.
An analyst at the time who acronymically wrote “Can’t Recommend A Purchase” about Robert Maxwell’s Mirror Group shares got fired. Then even “buy” may have meant “we had lunch with these people and are hoping to impress them”. “Fill your boots” certainly meant “buy”, but you needed to ask yourself who was filling them and what they may contain, because where there was a tip, as the old maxim taught there was a tap.
Anyway they’ve gone and done it again! No great surprise to me, in fact I predicted as much when I wrote at length about BrewDog in late July 2010; a 4,500 word dissertation, in a post titled, BrewDog – Greek Sex and a banana skin, Jimmy Choo’s and a little black dress! In that I detailed my thoughts on their beers, their financials and likely future direction. I likened them then to a teenage daughter experimenting with clothes and boyfriends and with a bit of boob on show but that for their medium and long term future, indeed survival said they needed to concentrate on where they made money and to only occasionally showcase their innovative and slightly mad spirit.
My comments on where they made money and in particular the pressures on working capital was perhaps prosaic as subsequently James Watt I saw had written a strongly worded open letter to HMRC, concerning cash flow , in terms of BrewDog’s payment experience of VAT and Beer Duty. So I guessed then it must have hurt them on occasions as it does all of us.
Anyway these troublesome brew punks are now offering craft beer lovers a second chance to buy a part of BrewDog, because last Tuesday, Brewdog’s directors, James Watt or Emperor Penguin, as he prefers to be known and Martin Dickie for a change donned sober City suits and traveled to London to launch a new £2.1 million share offer.
They are now aiming to raise at least a further £1m thorough the second “Equity for Punks” fundraising, enough for it to proceed with the building of a new £6.1m brewery on the outskirts of Aberdeen and to accelerate their bar opening programme at a budgeted cost of £100,000 each. The proposed new brewery, scheduled to open at the end of 2012, I believe could produce the equivalent of 30 million bottles of beer a year. This is five times current production.
The fundraising comes just over a year and a bit after BrewDog’s first share issue raised £642,000 although this was some way short of the maximum £2.3m sought. They are now offering four shares for £95 compared to £230 a share last time. Existing shareholders will have their holdings adjusted in a one-for-10 scrip issue; so a notional increase in value then to £23.75 a share in new form from £23.00. The share issue, which will cost the company £46,500, will proceed as long as it raises more than £100,000.
BrewDog has recently opened bars in Aberdeen and Edinburgh and others are in the pipeline for Glasgow, London and Manchester as the company aims to have a 10-strong chain by the end of the year. Shareholders receive a discount of 10% to 20% at Brewdog’s online shop and 5% at its bars. The issue values the company at £26m+. From an Investors viewpoint is the company worth this sort of valuation?
The simple facts:
First go back to their share offering in October 2009 – Equity for Punks 1! and in particular events just before the offering. Back then they offered 10,000 shares for £230 each which at the time valued the company at £25.0M+, this for a company that if you had looked at the documents would have told you they had sold a 12.5% stake to Griffin Group LLC for £600k only four months earlier, which deal valued the company then at £4.8m.
BrewDog’s accounts for 2009 which formed part of the prospectus revealed a small profit of just £147 but at the same time, turnover more than doubling to £1.8M compared with £0.78M in 2008. Profits of £350k were forecast for 2010. In the event the latest accounts, for the year to 31st December 2010 filed at Companies House show turnover almost doubled to £3.3M and operating profits of £221,199. Net assets are shown at £3.4M.
So a valuation of something like 120 x profit! Like for like sales in the current year for the first four months of 2011 are up 75% and BrewDog predicts turnover for the year close to £6.5M. Call it say £6.0M and profits at a slightly higher rate and this extrapolates to profits of £420,000 – £440,000, say £500,000 tops.
The off-trade I believe presently represents 75% of its UK sales and exports 60%
of overall sales. As the proposed opening of their bars now shows, clearly BrewDog wants a bigger slice of the on-trade for its kegs and casks so as to be less reliant on the low margin bottled market and multiples.
Now compare the above to Molson Coors purchase of Sharps Brewery in Cornwall for £20m back in February 2011. In the year to 31 October 2010, Sharp’s reported a turnover of £16.1m, up from £11.4m the prior year; while profits came in at £1.63m, up from £428,000 in 2009.
This company purchase therefore throws up a more sensible valuation of 1.24 x T/O & a P/E of around 12/13. On the same take out valuation BrewDog’s enterprise value would be around £6.5M/£7.5M; certainly not £26M+.
So overall I guess an old tipster would say Can’t Recommend a Purchase from an investment viewpoint. However if you want to be a member of a slightly anarchistic beer club then look at the £95 simply as the joining fee and don’t expect any dividend soon.
PUNK ROCKS!
Tags: BrewDog, Equity for Punks, G K Chesterton, Griffin Group LLC, Molson-Coors, Robert Maxwell, Sharp's Brewery
July 18th, 2011 at 6:58 am
You could always buy £95 worth of Lottery tickets or Scratch cards… I’m pretty sure you’d get something for your money within a week.
July 18th, 2011 at 7:02 am
My thoughts exactly. Although, as you say at the end, if you treat it simply as a club membership fee, then it’s worth it.
July 18th, 2011 at 7:06 am
Brilliant stuff. I enjoyed that despite the rather odd paragraphing!
July 18th, 2011 at 8:06 am
What you have failed to mention is the discounts that are being offered with these shares, as well as the other benefits of being a Brewdog shareholder. I bought shares the first time and increased my holding this time round as well.
I’ve made back most of my original investment in discount on the online shop, and as I drink regularly in a Brewdog bar I’m looking forward to the 5% discount when it becomes available as well.
If you are a fan of the limited edition Abstrakt series or the collaborations with other brewers you get the chance to buy before they go on general sale.
Having attended both shareholder events, I can honestly say I’ve had two great days out, been fed excellent food, and enjoyed some interesting beers as well without having to put my hand in my pocket all day. Granted there is an expense involved in attending shareholder events if you don’t live in Aberdeen.
Your article while covering the business side of things well, doesn’t include the full facts of what is actually being sold as a Brewdog share.
I probably would raise a dissapproving eyebrow if my pension fund invested 100% of it’s funds in Brewdog, but if you are someone who enjoys their beer, it is worth making a small investment, for the discounts and shareholder events alone.
July 18th, 2011 at 8:10 am
Ok read your article again . You do mention the discounts. It is a fun club to be in though.
July 18th, 2011 at 8:17 am
Thanks Peter. I know re the paragraphing! I have just updated to WordPress 3.2 and am struggling with it. I can’t use the main Post Board at the moment and have to do all through the Quick Post. Believe me it is still better than it was originally following a vain attempt to tidy it a little! I’ll have another go when I have a minute! Cheers.
July 18th, 2011 at 3:24 pm
Noticed a few errors! I think the new brewery will cost 1.6million not 6.1million! Its also ten bars by the end of 2012, not this year. Five bars planned for next year will be Liverpool, Sheffield, Birmingham, Bristol and Leeds. The Aberdeen bar incidentally is not owned outright by Brewdog. You also neglected to mention the holding in Anchor brewers which may be worth something and that dividends will not be paid until 2013 at the earliest.
Currently they can’t satisfy demand so the new brewery should bring increased revenues, not least due to increased autonomisation and economies of scale. They have currently suspended production for the on trade concentrating on growing off sales and signed an exclusive deal with Sainsburys for distribution of Punk and ’77 in cans this year. I assume all other supermarkets will try to jump on board when the period runs out.
They plan to retain the current brew plant too for the speciality beers. I assume they will invest in their own canning line to decrease the costs of outsourcing too.
July 18th, 2011 at 5:34 pm
Hi, Steve. Thanks for this. I have checked the prospectus, sorry financial offer, again and I am correct, Part A Page 15; cost of new brewery.
Building and Utilities £2,500,000 66% funded by commercial loan from a bank
Brew House £1,000,000 50% funded by asset finance
Tanks and Packaging £1,100,000 50% funded by asset finance
Environmental Technology £1,500,000 50% funded by asset finance
TOTAL £6,100,000
And re the new bars you are correct; I meant to say by the end of next year when they hope to have 10 bars operational. And I did see that BrewDog Aberdeen Ltd is 75% owned by James Watt personally with BrewDog PLC owning the remaining 25%. Also that BrewDog Bars Limited will enter into a lease for the bar in Glasgow from JBW (77) Limited at a market rent to be agreed, JBW (77) Limited been a company in which James Watt has an interest.
I was also aware that BrewDog has an indirect 5.25% stake in Anchor Brewers. This is via BrewDog PLC’s holding in Griffin Brewers and Distillers LLC (“Griffin Brewers”) (a holding company where the Company owns 150,000 common units of stock in (constituting 15% of the issued stock of Griffin Brewers) and in turn Griffin Brewers owns 3,500 common units of stock in Anchor Brewers (thus providing the Company with a 5.25% indirect interest in Anchor Brewers).
This shareholding was taken around the same time as Griffin & Co.’s purchase of 12.5% of BrewDog PLC in June 2009 when BrewDog sold the stake for £0.6M, which deal valued BrewDog then at £4.8m.
I didn’t mention this as I would then have had to detail the sub note under, Part B Risk Factors which says:
Some of the Company’s assets may not be realisable at the value ascribed to them by the Directors. The Company’s 15% stake in Griffin Brewers and Distillers LLC, which the Directors have valued at circa £1.7m, may according to the Company’ auditors, in fact be valued at circa £0.5m. There is no guarantee that either of these two valuations represents a fair price or achievable price were this investment ever to be sold.
I would have then had to comment on the Capital and Reserves which shows share capital of £51,640, a Share premium Account of £1,082,901, a Revaluation Reserve of £1,955,850 and a Profit and Loss account of £311,113. Take out the valuation difference above and the share premium account; which has arisen from the share offers and you will see in fact our punk brewers have actually created very little in tangible form.
And I did read in the offer under “Risks in investing in unquoted securities and the New B Shares” that,
“No shareholder in BrewDog (whether owning A Ordinary Shares or B Shares) will be entitled to receive a dividend until 31 December 2012 at the earliest.” This does not mean they will be paid after that date, which is simply entitlement, indeed I doubt very much whether any dividends will be paid for years. Similarly no transfer of the B Shares may take place until 31st December 2012.
In this same section the Offer points out that, “ There are also no plans to seek a public quotation on any recognised investment exchange or other market for the New B Shares. BrewDog will not be subject to the Listing Rules of the United Kingdom Listing Authority, the AIM Rules, the UK Corporate Governance Code or any other similar rules or regulations applying to companies with securities admitted to or traded on a regulated market or exchange. Accordingly,
shareholders in BrewDog will have neither the rights nor protections available to shareholders in publicly quoted companies.”
I’m not sure whether you have invested or not, if so good luck, but I will not be convinced that shares in this company at this price, at the present time, is a sound investment, but if you are a follower of BrewDog and buy their beer online or in one of their bars then as I have said before simply look at it as a membership fee and enjoy the perks.
July 18th, 2011 at 7:20 pm
I’m pretty sure (not in a position to check at the moment) that the discounts only apply with a minimum investment of several hundred pounds.
July 18th, 2011 at 8:33 pm
Owen, the Offer shows the discounts are as follows:
5.4.1 Discount Rights of B Shares:
(a) Each holder of at least four (4) B Shares shall have the right to buy such
products (to include all beer, ale and other brewed beverages) together
with any such other products (“Products”) as the Board may determine at
http://www.BrewDog.com (the “Website”) for ten percent (10%) less than the
retail price such Products are sold for on the Website;
(b) Each holder of at least 8 B Shares shall have the right to buy Products for
fifteen percent (15%) less than the retail price such Products are sold for
on the Website;
(c) Each holder of at least 10 B Shares shall have the right to buy Products for
twenty percent (20%) less than the retail price such Products are sold for
on the Website;
(d) Each holder of B Shares will have a right to buy any Products at any
BrewDog Bar for five percent (5%) less than the retail price such Products
are sold for at the relevant BrewDog Bar;
July 18th, 2011 at 8:55 pm
Interesting to see Liverpool on the list of proposed new bars. It has any number of excellent cask beer pubs but lacks a bar in the style of the Euston Tap or Port Street Beer House.