E-Malt.com News article: Canada: Lakeport Brewing Income Fund taps successfully into the value-priced beer segment

When Lakeport Brewing Income Fund went public a little more than a year ago, few analysts would have predicted the thirst investors would have for the discount beer brand, The Globe and Mail posted August 18.

True, the Hamilton-based beer maker had momentum and was gaining market share in Ontario. But it was a young company, a discount brand going up against heavy-hitters Labatt Brewing Co. Ltd. and Molson Coors Brewing Co. in an ultra competitive industry.

"I don't want to sit here and say 'Oh, I'm shocked,' because I'm not," said Lakeport chairwoman and chief executive officer Teresa Cascioli. "Our stock has done well. I believe that if you work hard you will see that translate into something. Whether you're public or private, it will translate into some measure of success."

For investors, that success can be measured by a series of impressive monthly cash distributions. Since going public, Lakeport has raised its distributions three times, and in 2005 offered a one-time year-end payout of 29 cents a unit.

The 14-year-old company is also showing record growth, according to its second-quarter results released earlier this month. Sales increased to CA$43.5-million in the quarter, up 21 per cent from a year earlier. And earnings before interest, taxes, depreciation and amortization expense jumped 17 per cent to CA$4.9-million for the period.

Analysts said the beer maker has been able to control operating costs at a time many breweries are struggling to do so.

"I never expected the stock would rise this much this quickly," said RBC Dominion Securities Inc. analyst Katia Ivanova. "When their results came out they were showing growth ahead of what we expected, and their margins are also doing quite well. It's done extremely well."

That growth is due in part to Ontarians tapping into discount beer. Over the past three years, market share for the so-called, value-priced segment has jumped to 30 per cent from 20 per cent. Lakeport has taken full advantage, with its 24 for $24 campaign, becoming one of the first brewers to actually brand itself as a discount beer.

Analyst Gareth Tingling at National Bank Financial said Lakeport's brand power has grown significantly despite a relatively limited marketing campaign. "The thing that's amazing about this story to me is that there were a bunch of pundits that have been following the beer industry for a long time who could just not bring themselves to accept the proposition that a value-oriented brewer could end up having a brand. It was something beyond a lot of people's understanding. But Lakeport has proven it's possible in spades."

In July, Lakeport recorded its best showing to date at The Beer Store, Ontario's main distribution and sales channel, accounting for 12 per cent of all beer sales. Two Lakeport products are also on the Top 10 list of best selling beers in Ontario.

Can Lakeport continue to grow at this torrid pace? While some analysts doubt it, Ms. Ivanova at RBC is positive about its prospects. "The question now is can they do even better . . . and it's possible," she said. "I think it will get more challenging as far as growth and gaining market share at the same pace because it is very competitive out there. The big brewers don't like to talk about the value segment but they're out there."

Earlier this month she raised her target price for the units to $18 apiece from $16.50. "I think I'm still a little bit conservative in my estimate," she said.

Mr. Tingling said Lakeport's units had been undervalued for much of the past year but that investors are increasingly more interested in the company as its trading volume rises. Mr. Tingling, who says a large number of Lakeport unit holders are also Lakeport beer drinkers, recently raised his target price for the units to $20.50 from $16.50 in May.

But he says the brewer does face additional challenges in the future. "The bigger question is how big can discount get in Ontario. I believe the discount segment is getting to the maximum limit. I think it's beginning to top out, and the major initiatives for growth have started to slow. It's going to be up to Lakeport to find a way to keep growing and boosting revenue."


18 August, 2006