The company behind Broo Premium Lager aims to list on the ASX with a projected market cap of $122 million, despite recording significant losses for the last three years.
Launched this week, Broo Ltd’s prospectus offers 75 million shares at an issue price of 20 cents per share, which would raise up to $15 million. With existing shares and minimum subscription of $10.5 million, its market cap on listing would be $121.6 million.
The prospectus says founder Kent Grogan holds 413,425,000 shares, constituting 65.57 per cent of the company if its Initial Public Offering (IPO) achieves the maximum subscription.
Broo launched its first product, Broo Premium Lager brand, in 2009. A subsidiary, Australia Draught Pty Ltd, launched the Australia Draught Beer brand in 2014.
The prospectus says the company has also developed two other brands that have not yet been commercially produced, Kakadu beer and H-Broo-O water.
According to the document, the ASX listing aims to fund the increased production, distribution and sale of its beers in Australia as well as expansion into China, under agreements signed with two companies.
“Production and packaging will be undertaken by Jinxing Beer Group, a prominent Chinese brewing company and distribution by Henan Liquor via its large distribution network and 260 retail outlets,” it says.
Capital would also be deployed to establish its own brewing facility “if a suitable and commercially attractive opportunity arises”.
Broo is currently producing its beers at Icon Brewing in Sydney.
Retained losses of $6.5 million
However, the document reveals that Broo recorded a loss of $2,652,497 for the year ended June 30, 2016, on the back of revenue of $516,334.
And the company’s balance sheet declares “retained losses” of $6,482,178.
“Investors should be aware that the company is in its development and expansion phase and has, for the last three financial years, sustained significant losses which related to the overhead, administrative and financing costs commonly incurred from the early operation of a recently established business and during the continued development and expansion of the business, and had not achieved profitability on an annual or half- yearly basis,” the prospectus says.
Asked to justify the company’s $121.6 million valuation, a spokesman pointed to the potential of the China deals.
“China consumes more beer than any other nation in the world. Jinxing produces more beer than the entire Australian market,” he told Australian Brews News.
“One of the world’s largest brewers, has been trying to secure a production and distribution agreement with Jinxing, but Broo has now done so.
“The distribution agreement including incentives is based on the sale of five million cases in the first year. This is not even a thimble-full in the China market.
“Broo’s kangaroo label will have enormous brand recognition and capture a meaningful part of international beer sales in China.”
Business model ‘unproven’
However, in an extensive list of “risk factors” declared in association with the investment, the prospectus acknowledges the brand has no track record in China.
“Broo Premium Lager will be a new product in the Chinese market, and there is no guarantee that Chinese consumers will take up the Broo Premium Lager product.
“Broo Premium Lager may be unable to compete with established brands on pricing or quality, or its flavour profile may be unsuited to Chinese consumers’ consumption preferences,” the document says.
Further outlining the risks, the prospectus says Broo’s business model is “relatively unproven” and an investment in the company is therefore of a speculative nature.
Elsewhere in the document, the investigating accountant’s report further advises investors to take heed of the company’s financial position.
“The company has generated losses and net cash outflows from operating activities and is reliant on its ability to raise sufficient capital to fund its operations and have sufficient funds to pay its debts as and when they fall due,” says Rami Eltchelebi of ShineWing Australia Corporate Finance.
“This statement indicates the existence of a material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern.”
Further information on the Broo IPO is available here.