Distil Plc: An underappreciated AIM drinks play with numerous catalysts for upside.
AIM is a market full of pitfalls. The vast majority of AIM companies will either lose investors a substantial amount of capital, if not all of their capital. Due to this, it can be hard to find the diamonds amid the rubble. However AIM is the market with high risk- high reward, once you do find these companies there is the potential for significant upside (potentially multi-bags). I believe Distil Plc may very well be that company.
Source: Redlegrum.com
Company Overview
Distil Plc is a micro-cap drinks company based in the UK. The company owns numerous different alcoholic drink brands including Redleg rum, Blackwoods, Diva Vodka, Jago's and Blavod Vodka. The most successful of those listed is Redleg rum which is stocked in numerous prominent UK supermarkets across the country including Tesco, Morrisons and Asda.
Redleg is truly the shining star in Distil’s assortment of drinks providing the catalyst for huge growth in the years to come as the brand has started to gain more and more traction. Blackwoods Gin And Vodka also provides good promise, showing some stellar growth over the first three quarters of the current financial year. Blackwoods delivered 41% sales growth in Q3, I am excited to see how this brand will perform over the next quarter.
Why I like Distil Plc
There is much to like about Distil Plc but my thesis primarily centres around five themes
Strong improving brand presence - particularly with its Redleg brand
Astute management who have been prudent over managing Distil's cash reserves over the last few years
Roland Grain has taken a 20% stake
Strong brand diversification and the small size of the company makes Distil versatile and very scalable
Profitable and a lucrative valuation considering growth runway
As shown by the above five points, I believe there is A LOT to like about Distil, the lack of liquidity and traction in Distil’s shares creates a sizable opportunity in my opinion.
As already highlighted, Roland Grain a Dutch entrepreneur with extensive experience in the drinks market crossed the 20% threshold last year and took a seat as non-exec on the board. He took this stake in the open market. I believe RG has a clear plan to execute and unlock significant value in Distil’s shares and definitely has a large amount of belief in the Redleg brand. It will be interesting to see what initiatives he brings forward over the coming year.
Catalysts for Upside.
Currently Distil has grown revenues at an explosive pace through the first three quarters of 2020, putting the company back on the strong growth path after a difficult 2019. Revenues are up 70% for the first 3 quarters, with exports up 200% and domestic sales up 60%. Distil has huge potential to further build connections abroad and make Redleg a truly global brand. With a market capitalisation standing at just £11 million, Distil has a TTM P/E of 50. Whilst this seems quite expensive, it's important to remember how versatile and scalable Distil is. As a small-cap any marginal improvements in top-line or margins will significantly improve that valuation.
Q4 results are expected to be delivered early next month and I believe they will round off an extremely strong year for Distil in style. If Distil maintained 70% revenue growth revenues would be just over £4 million with a net profit of around £400k assuming net profit margins of 10%, I feel this may be suppressed slightly as Distil looks to plough more money into marketing (necessary) to build brand presence. Q4 is usually a relatively quiet period for Distil, but I do feel they have a good chance of outperforming this figure. Nonetheless, net profit of 400k would give Distil a P/E of around 30 - not too unreasonable for a small, fast-growing drinks name.
On a side note, Redleg has also been steadily growing its social media presence with its Instagram following now passing 10k followers. This page also has strong engagement with 100’s of likes and numerous comments from Redleg lovers. I believe Redleg is very well-liked, recently topping the Amazon rum best sellers list. The company has previously set out a strategy to build up and sell brands but this always remains difficult and I believe it would be premature to sell brands at this stage on Distil's journey. Redleg has so much potential and I believe it will be management's focus to continue to build this before attempting to sell it on.
Conclusion
I believe Distil is worth a stab at current levels ahead of its Q4 trading update, where I expect a continuation of the strong growth seen in the first three quarters. I have been adding to Distil recently and it is slowly but surely becoming one of my largest holdings. I believe these sort of opportunities don’t come around too often and could see Distil being a £60 million+ market cap company one day if they can continue to build up both the Regleg and Blackwood's brands and steadily grow revenues and profitability. The company is also set to launch its new TROVE brand which I believe could prove to be another strong breakthrough brand.
Distil still appears underappreciated by the market to me and I believe will see a significant re-price over the coming years as the story unfolds.
I am/we are long DISTIL PLC.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.