I don’t generally get interested in business2consumer (B2C) shares.
EISB holds some intriguing similarities.
Air New Zealand. Okay, not quite British Airways, but EISB have secured a deal to supply 1st class passengers - just like Fevertree did with BA all those years ago.
Award Winning - a smattering of 9 silver and gold from the Spirits and Mixer Masters - the tonics get a very positive write up in the Spirits Business with its “tangy and tart yuzu” on the palate and Ginger Beer “This authenticity followed through from the aroma to the flavour profile, securing the top award”
Cocktail Courier
“East Imperial become the official mixer in their cocktail kits delivered to over 1,000,000 US homes, is a testament to Jaron's business development capabilities and the power of our brand versus other players in the US market. Management believes that having East Imperial in the hands of this audience will drive both trial and sales.”
This appears to be a bit of a coup. Cocktail Courier has been going nearly 10 years and is a “go to” if Cocktails are your thing
Typically, its readership and members are a/ High Net Worth people and Wannabes trying to outdo each other - think people with their home bar or garden bar - plus Bar Tenders. Think about that last bit. This publication is read by people who make the drinks in Bars and Hotels, and buy in the supplies. Can you picture a Bar Tender from New Jersey saying “Hey boss, I’ve got a great idea, there’s a great new super premium tonic, and it’s all the rage. Customers will love it and the margins are fantastic.”
And that’s why it’s a coup.
Macau.
“With the strategic investment from INL Investments, we will see a renewed focus on growing our position in China as the super-premium mixer for this market. The focus for Q4 and Q1 2024 will be Macau, focusing on luxury accommodation and exquisite dining experiences to which our products are well suited.”
Pre-covid there were 39m tourists a year spending US$40bn a year. While there are not Macau alcohol statistics broadly in China Spirits consumption is enormous worth US$166bn/year
So the “Asian Las Vegas” where people go to have a great time, seems a great way to focus on growing sales.
Forecasts:
Key Asumptions: (I’ve used the interim report and the 2022 annual report to obtain numbers)
I’ve calculated the price per case in 2021 was £13.51 and 2022 was £14.02. I’m using £14.02 for 2023 and 2024. This might be conservative. While case sales are not disclosed in the interims, I estimate at 89,642 cases for H1 2023 which is 22% less than 2022.
I’ve calculated the cost per case in 2021 was £10.91 and 2022 was £11.83. Adjusted cost per case in H1 2023 I estimate at £11.76 which is highly consistent to H2 2022.
I’m conservatively assuming Overheads are static despite EISB saying we “anticipate further efficiencies to help drive a lower operating cost base, including an incentive program tightly aligned to broader business targets”. Tightly aligned means you get great commission but don’t expect a base salary bump :)
I’m not making any assumptions around other income, FX, just focused on operational outcome.
I’m assuming Receivables remain low in H2 (I previously commented that they would run a tight ship on receivables) but inevitably rise next year. Charging for FOB basically means the money is due when it reaches the ship, not when it reaches the customer.
Sales - I’m conservatively assuming +40% in H2 (89,642 cases) at £14.02/case.
I’m doubling volumes in H1 2024 and doubling again in H2. This is a key assumption. But that equates to an additional 125k cases in H1 2024 and 250k cases in H2. With 12 bottles per case that’s equivalent to 1% in H1 then 2% in H2 of Macau tourists enjoying just 4 bottles of East Imperial mixers during a holiday. Or the 1m Cocktail Courier recipients receiving 1 bottle each plus 0.4% then order a case in H1 and just a quarter of that 0.4% go on to order a case a week in H2 “coz, boss, yeah, this stuff is selling like hot cakes - and, yeah, let’s talk now about that tightly aligned incentive scheme we was talking about”. Or Air New Zealand selling a single bottle to 1% of its 17m annual passengers and of those a third go on to buy a few cases.
Or some combination of the above plus everything else which is going on.
For example I do know that Supermarkets are CONSTANTLY vying with one another even stores from within the same company. Notably, one NZ Supermarket stocks EISB then another follows suit. In the 2022 Annual Report: “Foodstuffs, New Zealand’s largest food retailer, extended our placement across 102 North Island stores. With this, we are now found in all New Worlds and their competitors, Countdown (110 stores), across the country.”
My final key assumption is margin. I assume we see 20% margin (i.e. the same as H1’s adjusted margin, i.e. no more written off stock), followed by 32% in 2024 (WH Ireland’s estimate) when “Management believes over time that a goal of a margin above 45% is achievable for a super-premium product.”
Investment Thesis
Should you invest? I don’t give advice. But giving myself some advice I’m happy to continue to hold here. Extremely happy I topped up and averaged down at 0.9p because I’m now back in profit. Will it survive its rocky past 12 months? - my numbers appear to say yes. Will there be dilution - again yes - but the nature of the scheme means as the share price rises the dilution diminishes. Currently it equates to about 10% dilution, which I’m more than happy with.
Could EISB be the next Fevertree? When you extrapolate to FY2025 things get very exciting. When you hit 45% margins, not 32% this becomes very profitable. Applying a 30X valuation to the FY2024 H2 adjusted profit arrives at a target value of £45m which is 5X today’s market cap. Doubling again in 2025 and applying 30X arrives at a 10 bagger - just like Fevertree.
A final thought:
Do you want to see East Imperial being sold online? Click here if you do
A Kiwi Dollar is $1 = £0.49 so a 10 pack is about £11 or £6.11 a litre.
Fevertree in Sainsburys is £8.25 and £4.71a litre.
So East Imperial is 25% more expensive. But award winning.
What about the Peter Lynch test…. only buy what you know. So it passes. I would pay extra for something that tasted that much nicer. Ironically, with Fevertree’s ditty of “when the tonic is 80% of the drink….” echoing in my head!
Have a great weekend reader, and thank you for reading the latest thoughts from the Oak Bloke.