Supply chain/labour challenges to take toll on United Malt’s earnings

While United Malt (ASX: UMG) was up around 5% last week, despite having nothing new to say to the market, the company gave back all of those gains in early morning trade today.

The world’s fourth largest maltster’s share price shed -5.20% following revelations that annual earnings are expected to be affected by numerous costs, plus global supply-chain disruptions, tighter labour markets and drought in Canada.

CEO Mark Palmquist advised investors that the drought in Canada had reduced barley yields and quality, driving up FY 2022 production costs by between $10m and $13m.

Within today’s trading update, the company guided to expected earnings for the half year ended 31 March 2022 and for the full year ending 30 September 2022 of $57m and $115 -140m respectively.

Most broker analysts were previously expecting FY22 earnings around $153.4m.

Reduced earnings can be attributed to:

• Stalled sales, stemming from problematic supply chains, is expected to reduce earnings (EBITDA) for the year by around $8m.

• Tight labour markets and the implementation of a new tech platform are expected to increase software costs by around $13m.

• Management also notes the labour squeeze severely culls the FY22 benefits from the company's transformation program to $4.5m, versus the $30m previously expected by FY24.

Volume and costs up

While management expects sales volumes in United Malt's processing segment to exceed those of FY21 - as demand recovers from covid pandemic levels - higher input costs are expected to cut earnings by around $4m.

However, price rises over the next nine months are expected to reduce the impact in FY23.

Will suitors circle?

Despite the outlook for United Malt remaining decidedly cloudy, one broker sees the stock as a potential takeover target.

Citi recently mooted that France’s InVivo Group – which wants to become the world’s largest malt producer within five years - could be the first of a number of a likely suitors, interested in making a bid for the company.

“With financing appearing to be largely in place, the company is targeting acquisitions in the US and Australia among other regions, with UMG a logical potential target given its high-quality assets in those geographies,’’ Citi noted.

Reopening play

Most brokers have a Buy recommendation on United Malt.

But it remains to be seen whether today’s announcement derails the view that the company is a high-quality reopening play, which will eventually benefit from recovering beer consumption in the US and Asia.

United Malt share price movement.