MGPI - MGP Ingredients: Well Positioned To Benefit From Growth In U.S. Spirits

2023-09-04 04:09:24 ET

Summary

• MGP Ingredients has performed well in 2023, with stock prices up 16%.
• Slightly trading at a premium compared to the sector median but in the range of a 5-year average based on forward P/E.
• Well-positioned to benefit from the growth in the U.S. spirits market and has a strong liquidity position.

Investment Thesis

MGP Ingredients ( MGPI ) has performed well in 2023 and stock prices are up significantly by 16%. At the current market price of $119, MGP seems slightly trading at a premium compared to the sector median at 22.02x based on forward P/E, but in the range of a 5 year average. Although the company has strong momentum in terms of revenue and margin, supported by strong liquidity. I believe investors should watch for levels around $90-$95 for a buying opportunity. At this price, the valuation will be in the range of the sector median ~17x-18x and will provide better safety of margin.

Sustainable Business Performance

MGP is a producer and supplier of distilled spirits, branded spirits, and food ingredients. The Company operates through three segments: Distilling Solutions, Branded Spirits, and Ingredient Solutions.

The total revenue increased to $782 million in FY-2022, an increase of 25% Y/Y. Total sales went down due to Covid in 2019-2020. However, the company has shown strong recovery and revenue increased by 2x.

Distilling Solutions segment is the largest with 55% of total revenue at $428 million. In Q2-2023 , the revenue increased by 9% Y/Y due to increased sales of premium beverage alcohol and higher brown goods sales. Brown goods including premium bourbon, rye and other whiskeys contributed the largest sales to distilling solutions. The key strategy for this segment is to shift business mix towards higher margin opportunities through premium beverage alcohol. Due to this, the gross profit margin has increased to ~30% between 2021-2022 compared to ~22% between 2018-2020.

Branded Spirits segment is the second largest with 30% of total revenue at $238 million in FY-2022. The sales marginally declined in the latest quarter due to decreased sales of brands for the mid and value-price products. However, this was partially offset by increased sales of brands for the premium plus-price products. This segment provides a platform for both organic and acquisitive growth opportunities. MGP acquired 100% of Penelope Bourbon which enhances its sales presence in the growing American Whiskey market and expanded product portfolio of premium-plus price point brands. This acquisition will be accretive to segment gross margin and consolidated adjusted EPS. Furthermore, total cost synergies of ~$5 million are estimated by 2025. This segment is also showing an increase in gross profit margin to 40% in FY-2022 due to focus on premium plus-price products and the expected margin enhancement due to Penelope acquisition.

Ingredient Solutions segment contributed 15% of total revenue at $116 million in FY-2022. In Q2-2023, the revenue increased by 18% Y/Y due to growth in sales of specialty wheat proteins and commodity wheat starches. The wheat proteins and starches are a rapidly growing market with significant long-term growth due to changes in consumer preference (e.g. plant-based high protein foods, and lower net carbohydrate foods). The gross profit margin of 27.2% in FY-2022 is the highest compared to the margin between 2018-2022.

In a nutshell, the MGP topline is showing signs of growth momentum driven by changing product-mix shift to premium products and a change in consumer preference. The management is expecting 7% revenue growth in FY-2023. Moreover, all segments have shown improvement in gross profit margin, which is a significant catalyst for investors. Furthermore, management is projecting 14% growth in adjusted EBITDA margin in FY-2023. This shows operational efficiency as growth in EBITDA is higher compared to revenue growth.

Distilling Solutions Well Positioned To Benefit From Growth In U.S. Spirits

In the chart above, we can see that distilled spirits in the U.S has grown for 13 straight years to capture the market share of total beverage alcohol. The volume increased by 4.8% Y/Y to 305 million cases and revenues increased by 5.1% Y/Y to $38 billion. The most important trend observed is growth in premium selection across product categories that continued to drive U.S. volume growth for high end and super premium brands. To capture the growing market, MGP has already started focusing on premium brands. American whiskey has shown strong momentum within the distilled spirits market and was continuously growing over the last decade. MGP’s collection of aging whiskey inventory is projected to increase in market value as it matures, resulting in sustainable contributions to the bottom-line in the coming years.

MGP has launched high end premium spirits to capitalize on the fastest growing price segments. In summary, historical trends in the U.S. market indicate sustainable growth opportunities for distilling solutions and MGP is well positioned to capture the market through innovative product launches.

Strong Liquidity Position

Adjusted EBITDA less capital expenditure (as a percentage of adjusted EBITDA) remains at a healthy level considering recent increased capital expenditure. The adjusted EBITDA conversion at 73.2% is the highest compared to the period between 2019-2022. Moreover, the Branded Spirits products have supported improved cash flows and provided for long-term growth opportunities. The net leverage ratio at 1.1x is at a reasonable level to prioritise capital allocation strategy focused on growth opportunities. The company has recently acquired Penelope Bourbon and M&A is expected to be a key lever to increase capabilities, margin, and accelerate growth in Branded Spirits. In addition to maintenance capital expenditure, any projects supporting growth and strengthening its competitive position will continue to be focused.

In terms of liquidity, MGP access to capital remains robust with $400 million of capacity available on credit agreement and further approval for an additional $120 million in private placement notes.

Valuation Analysis

At the current market price of $119, MGP seems slightly trading at a premium compared to the sector median at 22.02x but in the range of the 5 year average. Although the company has strong momentum in terms of revenue and margin supported by strong liquidity. I believe investors should watch for levels around $90-$95 for a buying opportunity. At this price, the valuation will be in the range of the sector median ~17x-18x and will provide better safety of margin.

Final Thoughts

The key investor takeaway is that MGP is a solid company with robust historical revenue growth post pandemic and projected growth. MGP is poised to outperform due to product shift to premium products, gross margin expansion, better management of cost structure and supportive liquidity position for capex/M&A. However, investors have to watch closely the impact of product mix on revenue growth as it is the key metrics for growth in future. In addition, the investor should track the management comments on the road map for better gross profit margins. In a nutshell, although the company has strong momentum in terms of revenue and margin supported by strong liquidity, investors should wait for a reasonable valuation with better safety of margin.

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