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Research: Eastside Distilling

I think* that the market might be missing something here. It looks to me like the sale of Redneck Riviera (RR) yesterday should be a bigger deal than the stock price is suggesting today.

I looked at the stock a few months ago. I wasn’t totally convinced about the cash position and losses. They were turning things around but still losing money. But this sales changes that picture quite a bit I think. They are selling a money-losing, albeit new and growing (pre-pandemic) brand for, from what I can tell, around 3x revenue.

On their Q2 call they talked about their canning business (called Craft Canning, canning 3rd party bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers). They said “A company of this nature typically is valued at 1.5x sales or 6x EBITDA.”. In the Q&A they qualified that as a valuation for a PE investor interested in this type of business.

I do the math on this and Craft Canning is probably worth $15mm to $18mm itself (Canning and Bottling was $2.56mm in Q220 at 30% EBITDA margins). Unless I’m missing something, that is more than the company is worth right now after they get the $8mm from RR.

I might be missing a piece, still digging (need to look at the share comp for Azunia still), but based on what I see so far, I think this stock should be higher.

Notes from last Q2 and from RR sale.

  • $1.9mm of cash
  • $5.7mm of debt
  • another $15mm of deferred consideration for Azunia which is just shares I think
  • 10mm shares outstanding at $1.40 is $14mm
  • so its an EV of $20mm roughly and that is before $8mm from RR sale – so $12mm now versus CC which is probably worth $18mm

Q220 results

  • cash burn cut in half from Q120
  • Craft Canning has dominant position in Pacific NW
  • CC revenue up 20% yoy in Q220
  • CC “doubled from first quarter to second quarter”
  • customer list for CC was up 30% since March
  • expect CC to have 35% EBITDA margins in Q320:

The current EBITDA margin from this business unit is well over 30% in 2020. We estimate the division can possibly reach $10 million in sales.

  • CC benefiting from pandemic:

“before the pandemic, 50% of beer was being put in kegs, and then it wasn’t. I would suggest this change has legs.”

  • they peg canning operation at 1.5x revenue, 6x EBITDA
  • CC was $2.56mm of revenue in Q220 – so even ignoring growth – is probably worth $15mm-$18mm+ on its own
  • are in process of downsizing overhead, made expense cuts of $2mm (annually?)
  • they do mention potential for outsourcing
  • Redneck Rivera revenue was down 30% yoy – from 10Q this was $0.2mm – suggests RR sales were about $670k pre-pandemic
  • Azunia revenue down 38% yoy because it depends on on-premise business and that was shut down
  • Azunia is relatively new brand – they acquired Azunia Tequila in Sept 2019
    • at the time had TTM sales of $3.5mm on 13,000 cases sold
    • sold into on-prem location in West and SE US
    • they said expect a positive EBITDA impact from Azunia in 2020
    • acquired as all-stock transaction
    • it looks like 850k shares up front, 350k shares after 18 months
    • another 1.5mm shares if Azunia ups revenue to $9.45mm in Y2
  • Portland Potato Vodka revenue was up 18% yoy
  • Burnside revenue up 4% yoy
  • Pacific NW beer + wine market is around $100mm, they have about 10% of it
  • on craft side they are only in Oregon, Wash, Colorado right now
  • had 11 delivery trucks heading into quarter, brought new one on in Q2, have another 2 on order

Sale of RR and Q3 Update

  • announced Q320 revenue of $4.5mm to $5mm – this would be up from $4mm in Q220
  • also further EBITDA improvement
  • selling RR for $8mm
  • so that alone is very good
  • RR was clearly a money loser, not sure how much
  • I think RR revenue was about $2.7mm or so pre-pandemic so they are selling it at almost 3x revenue
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