‘Not for faint-hearted’: Portfolio manager tells of whisky bet on Lark

‘Not for faint-hearted’: Portfolio manager tells of whisky bet on Lark

Date of Report: Market close on Tuesday, 21st June
ASX: LRKPrice: A$2.74

52 Week Range: $2.42 - $5.60

Market Cap: $199.56M

Sector: Food, Beverages & Tobacco

Every second week we invite a leading fund manager to present at The Insider: Meet the Fund Manager. In March, Andrew Smith, from Perennial Partners, selected Lark Distillery as one of his three favourite stocks, citing what he sees as an attractive valuation gap after the company was sold off following a scandal involving its then-CEO.

25th March, 2022

11th May, 2022

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This year marks the 30th anniversary of Tasmanian whisky fan Bill Lark’s success lobbying the government to change spirit-making licence laws, opening the door for his own eponymous distillery to open later that year.

For more than 90 years, distilling licences could only be granted to those using wash stills with a capacity of 2700 litres or more, effectively limiting the practice to major manufacturers.

Eager to start making his own high-end whisky, Mr Lark lobbied the government and was granted the first general spirit makers’ licence issued in Tasmania since 1839.

Thirty years on, the brand he started has won numerous awards for its whiskies and is celebrating the dual anniversary with a series of special events and releases as it eyes off global export markets.

Unfortunately, this celebratory year started on a wrong foot. In February, videos were published of then-CEO Geoff Bainbridge allegedly recreationally using a Class A drug.

A scandalous few weeks ensued, during which Mr Bainbridge claimed to have been the victim of a foreign extortion racket while eagle-eyed journalists splashed their doubts across front pages around the country.

The share price tumbled as the news broke and gathered pace, but for Perennial Partners’ Andrew Smith, the sell-off wasn’t reflective of the business’s underlying operations – and may even have been an opportunity, for those prepared to weather the storm.

So why buy a business after this kind of scandal hits its senior management team?

Mr Smith noted the company has roughly $432 million worth of whisky sitting in its ‘whisky bank’ – an estimate based on the price consumers paid per litre last year – which it can package, ship and sell when it needs.

Effectively, he said, the company has a strong asset backing, which isn’t properly captured in the current price.

“When we see this big overreaction in the market with little change to fundamentals, we see this as a strong opportunity for those with a longer-term investment horizon,” he said.

“Something like Lark, we’re buying on bad news – that’s given us a valuation gap that we think looks pretty attractive but I will say it’s not for the faint-hearted.

“It will take some patience for this to play out, but we think the start of a strong valuation appeal is there.”

The whisky bank plays an important role in how the business is planning for its future too, according to interim CEO Laura McBain, who previously served as a non-executive director before quickly stepping into the top job following Mr Bainbridge’s departure.

Ms McBain said the whisky bank enables Lark Distillery to focus its attention on a number of creative and limited-release whiskies and has helped secure its longer-term successes.

“It’s a really interesting way of thinking about the future potential of this company and the whisky bank is a way that we can be confident going into expansion in Australia and also expansion in export markets,” she said.

With the global market for whisky expected to grow at 8% per annum until 2025, Ms McBain said the company is now looking to introduce its products to export markets.

Click here to view more videos from Andrew Smith’s The Insider: Meet the Fund Manager session, or click here to view the full The Insider: Meet the CEOs session.

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Martin Pretty

Founding Director & Investment Manager
Equitable Investors

Equitable Investors, an independent investment manager, operates the wholesale Dragonfly Fund – a top-5 domestic equities fund in FY21 with a 74.3% return. The company specialises in market segments with higher total returns, namely larger strategic opportunities, listed micro-to-mid cap companies, unlisted growth opportunities and mezzanine or alternative financing. Martin Pretty gained vast financial experience as an investment manager at Thorney Investment Group, helping deliver one of the group’s highest annualised three-year returns (18.2% per annum) as at February 2017. He is the director of several ASX-listed companies and as a financial journalist has contributed to the Australian Financial Review and other reputable publications.

The CEOs of all the companies chosen as Fund Manager favourite stocks are invited to present at our Meet the CEO series. Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets position.
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