Thread by @DownunderValue

Lark $LRK LRK.AX is an award winning whiskey distilling company based out of the beautiful Tasmania that’s been in the news for all the wrong reasons. Does yesterday's 20% drop in the share price give us a buying opportunity?

Let’s take a deep dive. 👇

1. Investment thesis: Asset play.
✅Award winning whiskey
✅Growing asset base through acquisitions
✅Growing revenues with positive earnings
✅Valuations at or below net tangible assets
❓Risk of new management & Bill Lark

2. Lark was set up by Bill Lark, the ‘Godfather of Australian Whiskey’ who was inducted in the Hall of Fame in 2015.

Only 1 of 7 people outside of Scotland to claim that feat.

3. Lark has a portfolio of highly awarded and highly regarded whiskeys that keeps on growing

4. Lark is a top-ranked whiskey producer that scoops medals wherever it goes. They reached the final 4 for best whiskey distiller in the world in 2020.

This drives up intangibles, net sales revenues and asset valuations too.

5. At a strategic level, Lark have a platform for growth built around branding/pricing, inventory management and capital allocation.

6. Worthwhile to note that it takes 5-8 years for Lark to mature their single-malt whiskeys. So when we look at asset valuations, we need to keep in mind the lag between production and sales.

7. Lark recently acquired Shene Estate, which owns Pontville Distillery.

A beautiful estate with 130kl production facilities and 483kl of whiskey under maturation.

8. Lark then CEO Geoff Bainbridge said: “We’re effectively buying the liquids at $49 a litre, and we’re selling them at $216 a litre.” – literally 4x’ing their money while the liquid evaporates. Love it.

9. $13m CAPEX for Pontville distillery in FY22/23 will expand Lark’s total production from 193klitres to 576klitres. They could expand up to 1million if they wish. And the House of Lark now has a third hospitality venue set on 40acres.

10. Strategically it’s a smart acquisition as 29% of the sales will come in FY22/23 ($7m of cash flow), and it enables Lark to bring forward its export strategy by 12 months to FY23. Some immediate value creation for shareholders.

11. The cap raise was undertaken at $5 per share.

As of last night's $3.60 share price, that's a 28% hair cut in 5 months for investors. It's also well below Ord Minnett's TP of $6.08 at the time of the cap raise.

12. Revenues have been increasing at a phenomenal rate, and will continue to grow at 75% CAGR until FY25 at least.

13. Lark have opened up new cellar doors. And while revs are down 36% to $850k in FY21 due to Covid, I suspect this will bounce back with a vengeance.

Check out this bad boy they recently opened in Hobart.

14. Okay, so that’s Lark in tumbler. But is it a good investment?

Let’s look at three methods of valuations.

15. The asset valuation based on the statutory accounts is based on the cost of production.

Similar to Treasury Wine Estate, it’s not a fair representation of the balance sheet.

16. Lark provide a more balanced view of the whiskey bank – around $120m at today’s price excluding Shene, growing yoy with maturation and expanded production.

17. Using the current valuation (i.e. what it would be worth if liquidated today), you can see the share price (as at $3.60 cob on 16/02/22), $LKR is trading at a slight premium to the NTA ($3.37).

18. Using the value at maturation between now at FY27, Whiskey is expected to be valued at $430m by the end FY22 with Shene inventory included.

This is a substantial discount to NTA - but don't be fooled, that's pricing in tomorrows profits today.

19. Out of due respect I won’t discuss Geoff Bainbridge’s circumstances.

But the new CEO McBain is a risk. She oversaw a pretty tumultuous time at Bellamys where exports to China got smashed, and she eventually left the company.

20. After Bellamy’s she then turned her attention to Maggie Beers where the share price halved in two years. Though many would say she put in the foundations for some good things to happen.

21. Another risk is that Bill Lark stops making award winning whiskey, departs, etc. Key man risk is a real challenge, and could diminish the prices and asset valuations. Though he is the founder and a substantial share holder.

22. Final risk to flag is covid / inflation continue to impact supply chains, access to glass bottles, etc.

But perhaps more important is the impact on hospitality/cellar doors. I choose to look through that as I think we're returning to BAU and see this as a positive.

23. Overall, the investment is backing Bill Lark to keep winning awards and maintaining a premium for their product – while management doesn’t implode and destroy shareholder value.

Almost an asymmetric bet at ~$3.37, but I note the share price jumped 10% this morning.

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A deep dive per fortnight is my commitment to FinTwit. Questions and feedback always welcome. DYOR.

Disclaimer, I bought a small position in $LRK at $3.60 yesterday and hope to build on pull backs.

Perennial Value Management, a major shareholder, topped up of the tune of $6m - adding to a position they increased by $5m only on 2 Feb. #confirmationbias

Note 1H22 earnings results are expected on 21 February 2022.