United Malt Screens Undervalued as Supply Concerns Ease and Demand Improves

Shares in no-moat United Malt UMG are undervalued compared with our unchanged AUD 4.00 fair value estimate. The maltster’s earnings were ravaged in 2022 by the poor quantity and quality of drought-hit Canadian barley. Negative mix shift is also weighing on profitability, as big brewers command a larger proportion of malt sales at the expense of higher-value demand from craft brewers. But we expect headwinds to be short-lived. An improved 2023 crop is in sight and demand for craft beer is normalising as alcohol consumption moves back to venues.

While cropping conditions can fluctuate from year to year, we expect improved earnings following the 2023 crop harvest to support further earnings recovery in fiscal 2024. The latest projection from Agriculture and Agri-Food Canada is for 2023 Canadian barley crop production to be 42% higher than 2022—about 11% above the five-year average, with similar production flagged for 2024. This is likely to place downward pressure on barley prices—a key input cost for United Malt. With sufficient quality and quantity of barley projected in North America, the additional costs associated with importing barley in fiscal 2022 are unlikely to recur in fiscal 2023.

Demand has also recovered. Getting consumers back to bars (rather than at home) is crucial for United Malt’s profitability. Craft beer is skewed toward conspicuous out-of-home consumption, and sales to the higher-margin craft segment were squeezed amid coronavirus restrictions. But we estimate out-of-home beer consumption has now recovered above prepandemic levels. Per U.S. Census Bureau data, spending at “food services and drinking places” minus restaurant spending—a proxy for draught beer consumption—was 63% lower in April 2020 than April 2019. But the data shows, in the absence of restrictions, out-of-home consumption has rebounded to above-trend since mid-2022—painting a positive picture for United Malt’s higher-margin craft beer customers.