Investor appetite for Broo Limited in spite of its “ludicrous” market valuation suggests there is scope for other brewers to follow the IPO path, says Select Equities co-founder Danny Goldberg.
Goldberg, whose firm assisted in raising capital for brewers including Little World Beverages (prior to its sale to Lion/Kirin) and Stone & Wood, was commenting on Broo’s October ASX listing.
“I think there’s significant investor demand for a successful brewery,” he told Australian Brews News.
“There’s no beer stock apart from Gage Roads on the ASX. Now there’s Broo and there’s proof that there’s investor demand.”
However, he said only brewers that fulfil certain criteria should consider the IPO path, affirming the advice of Deloitte analyst Tapan Verma.
“My view is that the ASX is not a good place for a start-up company. You need to be generating profits,” he said.
“The ASX is littered with companies that are not profitable, and it’s an expensive and unforgiving environment for those companies.
“Private equity is a better place for companies that are unprofitable.”
Broo Ltd CEO Kent Grogan said the brewer’s initial $122 million valuation was underpinned by its peerless opportunity to conquer the China market.
But despite its strong ASX debut, Select Equities’ Goldberg had a blunt assessment of the longer term prospects for the company, which has Broo Premium Lager as its flagship brand.
“A: Never heard of it. B: The valuation is just ludicrous, it’s ridiculous,” he said.
“Just because they’ve raised the money doesn’t mean they’ll succeed. The barriers to entry in this business are huge, and the barriers to success.”
Turning customers into investors
Broo’s approach of raising capital on the ASX via its own customer base, mum and dad investors, flies completely counter to prevailing share market trends, OnMarket Bookbuilds CEO Ben Bucknell told Australian Brews News.
“IPOs are increasingly exclusively offered to the big end of town. Eighty six per cent of the capital raised in the last 12 months was raised on six IPOs, none of which had a public offer,” he said.
Bucknell’s company helps retail investors access IPOs. He said Australia has the fourth largest retirement savings pool in the world, of which $600 billion is in self-managed super, which is currently excluded from participating in many of these capital raisings.
“That’s why it’s interesting to see someone like Broo come along who engages their customers to the point that they want to be part of their growth story as a business,” he said.
Other brewers such as Brewdog, Yeastie Boys and ParrotDog have successfully turned to their customers to raise capital via equity crowdfunding.
Bucknell said there are obvious benefits for converting a “wide and loyal following” of customers into investors.
“As you’re trying to build up an investor base and a customer base, there’s definitely benefits in having those pools overlap,” he said.
“Individual investors that understand the business’s products make for long-term shareholders.
“This is particularly valuable when management have a long-term vision for the company.
“This can allow management not to be hostage to short-term quarterly financial targets, which can be the focus of institutional investors.
“GoPro and Virgin America are both examples of a trend in the US of companies with great brands that engaged their customers as investors in their capital raisings,” Bucknell said.
Broo shares last traded at 29c, which represents a 45 per cent premium on its October 14 listing price.