Why Is Distil PLC (LSE: DIS) Moving Down The Ladder

Why Is Distil PLC (LSE: DIS) Moving Down The Ladder

Overview

Distil Plc was incorporated in England and Wales and has its main territory of operation in the United Kingdom. The company is the owner and manufacturer of premium alcohol brands like Blackwood’s Limited-Edition Vintage Gin, RedLeg Spiced Rum, Blackwood’s Vodka, Blackwood’s Vintage Gin, Blavod Original Black Vodka, Diva Vodka and Jago’s Vanilla Cream Liqueur.  The company based out of London and operates globally. The reach of its products includes the United Kingdom, United States of America, Germany, Spain, Australia and Russia.

Q1 FY2020 Trading Update

In the trading update for Q1 FY 2020 period (April – June 2019), year over year revenues fell by 20%, while volumes decreased by 15%. The year over year downside came from lower United Kingdom sales. The muted performance was due to poor weather and fewer promotional slots. The weak numbers for the quarter versus the year-ago period were more prominent in spiced rum sales. However, the management is bullish on the Distribution side and has planned new promotional activities for the rest of the year.

Industry Backdrop

Distil operates in the alcoholic drinks business segment, which is highly competitive with a consistently changing consumer backdrop. The consumption of the ethanol-based drink, which is made by the fermentation of sugar (Be it fruits, grains or any other source) is always a matter of ethical debate. According to media reports, globally, the largest share of the market pie for alcoholic drinks remains Europe. In Europe, the most significant chunk of demand for alcoholic drinks comes from the Big Four in Western Europe. The Big Four is a motley collection of the Western European nations of France, Germany, Italy and the United Kingdom. As per analysts, the global alcoholic beverages market is expected to grow at a compounded annual growth rate of 2.0% from USD 1,439 billion in 2017 to touch USD 1,684 billion by 2025.

However, the point of concern for Distil and the alcoholic drinks business segment on a whole, is the proactiveness shown by the United Kingdom’s government to reduce the consumption of alcohol. The latest guidelines on the consumption of alcohol from the United Kingdom’s Government’s Chief Medical Officer is also not too encouraging either.

As per the directives provided by the Chief Medical Officer, the maximum bar for weekly consumption of alcoholic drinks business is fourteen units. The weekly consumption quota is equal for both man and woman. The fourteen units are equivalent to 14 glasses of spirits / six glasses of wine / six pints of beer. The apex health body also warned that exceeding the above limit may result in a broad spectrum of health issues. The health issues from excessive drinking regularly include cancer in throat, mouth and breast. As per the analyst, if all consumers in the United Kingdom comply with the drinking guidelines, the alcoholic drinks business is slated to lose GBP 13 billion annually. Also, consumers in the United Kingdom now prefer buying alcoholic drinks more from supermarkets than from public domains like clubs and bars.

The current issue raising eyebrows are signs of weakness for the United Kingdom economy. According to the recent manufacturing data revealed by IHS Markit on UK Manufacturing PMI, there has been again contraction in the manufacturing activities. Manufacturing PMI declined to 48.0 in June 2019 from 49.4 recorded in the month-ago period. Also, it was substantially below the consensus estimate of 49.2. The latest recorded data reflects an intense contraction in the manufacturing activities since February 2013. However, over the longer term, the investor class is bullish on the prospects of the economy of the United Kingdom.

Strong Premium Positioning in the United Kingdom

Distil generates most of its top line from the United Kingdom and mainly caters to the premium space. The United Kingdom is the company’s largest market, both in terms of value and volume.  The focus on premium space is concurrent with the ongoing market conditions. Currently, the alcoholic beverages premium segment is witnessing higher demand than other segments of alcoholic beverages. The upside came from increased awareness about the harmful effects of bad quality alcohol.

Smartly Creating Product Line Expansions in Growing Spirits Space

Currently, in the United Kingdom, the market is witnessing high growth rates in the spirits space versus beer and wine markets. Of the spirits space, the demand for gin has increased in the recent past. Consumers are waking up towards compound gins in the form of coloured, flavoured and sweetened gin (gin-based liqueurs). Dry gins also advanced on the back of new market entrants offered from the wave of new micro-distilleries. To capitalise on this, the company launched products like the Blackwoods Gin new vintage and RedLeg Spiced Rum.

Brexit Risks Aptly Managed

The biggest focal issue for the United Kingdom is a higher probability for a no-deal Brexit which has shaken the consumer and investors sentiments. If a no deal Brexit happens, it will result in without any backups; the United Kingdom would be out of the European Union. Popular public opinion also seems to be echoing this, as the prime contender for the position of next Prime Minister of United Kingdom’s was vocal over his support for executing Brexit in the first quarter itself of his assuming power. The Prime Minister candidate also announced that he would establish a “War Committee” to get the nation out of the European Union by 31st October, deadline. However, we are apprehensive that such political developments may muddle the economic indicators of the United Kingdom in the months to come. Already new economic data are pointing to a potential recession for the economy of the United Kingdom. Any further decline in the manufacturing indices would affect the unemployment rates. The downswing in the economy would invariably lead to reduced consumer spending and demands, leading to lower consumption of alcoholic drinks.

Further, in case of a no-deal Brexit, alcoholic drinks from the United Kingdom would not be able to register under the European Union’s geographical indication (GI) framework. However, the United Kingdom government has announced that in such a scenario, it would start its own GI legislation to protect its domestic products.

A closer look at the company’s books reveals that the company to minimise Brexit downswings has taken many prudent steps. Prominent among them was the procurement of bottle glass inside the United Kingdom. For its German production line of Blavod Black Vodka, however, the glass is procured in continental Europe. Finally, to minimise the effects of current economic fluctuations, the company invoices all its sales in sterling.

A Closer Look at FY 2019

For FY 2019, the company reported total sales of GBP 2.4 million, up by 19% from GBP 2.01 million in the year-ago period. The upside came on the back of overall volume growth of 15% year-on- year. Higher volumes supported the boost in volumes at RedLeg Spiced Rum, which saw volume growth of 45% year over year. However, with a macro trend of sliding gin and vodka sale; the company’s Blackwoods Gin and Vodka and it’s Blavod Black Vodka brands witnessed a year-on-year sales decline. In terms of sales revenues, RedLeg saw a 50% increase, while Blackwoods Gin and Vodka fell by 12% and 39% respectively and Blavod was down by 68 per cent, year over year. Blavod sales fell primarily due to a decline in non-licensed sales.

During the period ended 31st March 2019, the company’s net cash generated from operating activities stood at GBP 85,000 versus GBP 166,000 in the year-ago period. This has resulted in FY2019 year-end cash reserves of GBP 1.07 million versus GBP 1.03 million in FY 2018. The company remained debt free at the end of FY 2019.

Share Price Performance

On 10th July 2019 (after the market closed), Distil Plc shares closed at GBX 1.125 and remained flat against the previous day closing price. Stock’s 52 weeks High and Low is GBX 2.8500/GBX 1.0320. The outstanding market capitalisation was around GBP 5.65 million. The company’s stock beta stood at 1.05, reflecting the same directional movement of the stock as compared to the benchmark index.

Why the Stock Moving Down the Ladder

For every United Kingdom company, the pessimism in their performance starts from Brexit risk. This is because, the British Pound has become cheaper versus the United States Dollar since the Brexit clock started ticking. Looking further with increased risk of no-deal Brexit may lead to more downside of the British Pound versus other major currencies across the globe. This points to a treacherous path for the economy of the United Kingdom. Any further fall would affect the purchasing power and make imports dearer.

Overall, we feel Distil plc is a well-managed debt free play. But despite that, the stock is moving down the ladder owing to intense competition. The company operates in the ‘affordable premium’ space, which is witnessing the cutthroat competition. Management also attributed weak performance in the first quarter of FY 2020 due to reduced promotion activities and bad weather.