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(NYSE: BREW) TEAM MEMBERS: Purvi Mittal Leiyi Huang Harout Sahakian Rakesh Venkatayogi.

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Presentation on theme: "(NYSE: BREW) TEAM MEMBERS: Purvi Mittal Leiyi Huang Harout Sahakian Rakesh Venkatayogi."— Presentation transcript:

1 (NYSE: BREW) TEAM MEMBERS: Purvi Mittal Leiyi Huang Harout Sahakian Rakesh Venkatayogi

2 AGENDA Business Overview Macro-Economic & Industry Overview Technical Analysis Financial Ratios Valuation Recommendation

3 CRAFT BREW ALLIANCE – INTRODUCTION Business:  A craft beer brewing company with a unique alliance between three craft beer brands  Operates two segments:  Beer related operations: Brewing and sale of craft beers and cider from six breweries  Pubs operations: Operates 5 pubs for brand building  Has master distribution partnership with Anheuser– Busch Market Cap$281mm Employees~725 Annual production Capacity (000’s)1,075 barrels Source: Company website and 10K_2013

4 DEVELOPMENT STRATEGY Redhook / Widmer Merger Kona Merger Sale of FSB Omission Launch Square Mile Launch Merger Integration and Building Business Model Foundation National Portfolio Strategy Development and Initial Market Introduction National Portfolio Strategy Growth and Value Creation Source: CBA Investor Presentation Volume Growth

5 BRANDS Source: Company website and 10K_2013 Launched in 1981 in Seattle Distributed in all 50 states Launched in 1984 in Portland Distributed in all 50 states Launched in 1994 in Hawaii Distributed in 36 states Launched in 2012 in Portland First gluten free beer Launched in 2013 Distributed in 10 states and expanding

6 Source: Company website and 10K_2013 New Hampshire Brewery Annual / Max Capacity (000’s) 215 / 280 Hawaii Brewery Annual / Max Capacity (000’s) 10 / 10 Washington Brewery Oregon Brewery Annual / Max Capacity (000’s) 630 / 650 BREWING FACILITIES Annual / Max Capacity (000’s) 220 / 280

7 Source: Company website and 10K_2013 ANHEUSER–BUSCH PARTNERSHIP Ownership Structure Master Distribution Agreement  Distribution of Kona, Widmer Brothers, Redhook, Omission and Square Mile in all states, territories and possessions of the US  Distributor Agreement has a term that expires on December 31, 2018, subject to automatic renewal  CBA pays margin fees, invoicing, staging and cooperage handling fees, and inventory manager fees

8 Source: 10K_2013 and investor presentation Note: does not include alternating proprietorship revenue HISTORICAL FINANCIAL ANALYSIS Net Sales  Compounded growth of ~11%, primarily because of shift in mix towards packaged, which has a higher selling price per barrel than draft Gross Margin  During 2012 and 2013, product mix, variable costs, supply chain challenges and pubs pressured gross margin  Expected 5‐year gross margin expansion of 500 to 700 basis points

9 MACRO & INDUSTRY OVERVIEW

10 BEER INDUSTRY CHARACTERISTICS Success Factors Effective Quality Control Marketing of Products Control of distribution networks Establishment of brand names Global Beer Market Distribution By Volume Source: IBISWorld. Craft Beer Production in the US. August 2013; MarketLine Industry Profile: Global Beer. August Packaging Price Taste Ingredients Differentiation Factors

11 CONSUMER EXPENDITURE ON BEER – % CHANGE YOY Source: Passport. Euromonitor International. Consumer Expenditure on Alcoholic Drinks. February 2014.

12 THE CRAFT Growth In Craft Breweries 2011 – 1, – 2, – 2,483 Growth in Volume of Craft Beer 2012 – 15% 2013 – 18% Source: MarketLine. Craft Beer: A Fast Growing Market. September 2013;

13 SWOT ANALYSIS FOR BREW Strengths Distribution to retailers through A-B agreement Ability to test products in pubs before new launches Quality control by using local suppliers Weaknesses Majority ownership by Anheuser Busch limits some activities Shipping costs associated with Kona brand products Concentration in the Pacific Northwest Opportunities New product launches Expansion in domestic and international markets Consolidation in the industry Threats Changes in consumer preferences Increases in regulation or taxes, especially the excise tax Public relations and brand image

14 FINANCIAL ANALYSIS

15 TECHNICAL ANALYSIS Source: Yahoo Finance

16 FINANCIAL RATIOS Source: Brew 10K CRAFT BREW RATIOS COMPARABLE COMPANIES RATIOS* * Ratios calculated by taking averages of our comparable companies

17 FINANCIAL RATIOS Source: Brew 10K CRAFT BREW RATIOS COMPARABLE COMPANIES RATIOS * Ratios calculated by taking averages of our comparable companies

18 COMPARABLE COMPANIES Anheuser-Busch20% Boston Beer Co. Inc.30% Carlsberg20% Molson Coors Co.15% Heineken15%

19 COMPARABLE VALUATION P/E – 15% Forward P/E – 20% EV/Revenue – 15% EV/EBITDA – 15% Forward EV/EBITDA – 20% P/B – 15% Estimated Share Price $15.21

20 ASSUMPTIONS Assumptions 2009A2010A2011A2012A2013A2014P2015P2016P2017P2018P Sales Growth % 5.6%13.3%13.5%5.8%13.0%10.0%8.0% 10.0% Excise Tax Rate ( % of Sales)6.4%6.5%7.3%7.0%6.9%7.0%8.0% Gross Margin (% Sales)20.6%23.9%28.1%27.5%26.1%27.1%28.1%29.1%30.1%31.1% SG&A Margin (% Sales)18.7%21.3%24.7% 24.1%23.5%23.0% CapEx 5.5% 4.0%3.8% 4.0%3.8% D&A ($)5.5%5.0%4.5%4.0%4.2%5.0%5.3%5.6%6.0%6.2% Interest Expenses9.5%6.1%6.4%5.0%3.9%4.0%4.3%4.1% 4.2%

21 DISCOUNTED CASH FLOW ANALYSIS FCF Build 2014P2015P2016P2017P2018P EBIT 7, , , , ,916.0 Less: Taxes (2,918.0) (4,645.0) (6,049.9) (7,649.8) (9,642.4) Less: Capex (8,698.0) (9,089.4) (9,816.5) (11,159.8) (11,662.0) Less: Change in NWC 81.9 (1,314.9) (1,157.1) (1,249.7) (1,687.1) Plus: D&A 10, , , , ,027.5 Unleveled FCF 7, , , , ,952.1 Terminal Value Assumptions 4.0% Discounted rate (WACC)13.01% Terminal Value Discounted period (t) Discount Factor PV of FCFs (in thousands) 6, , , , , ,150.8 % of Total EV3.6%4.4%5.2%5.8%6.5%74.5% PV of FCFsTerminal ValueEnterprise ValueNet DebtEquity Value ($ thousands) Shares Perpetuity Method 44, , , , , , Price$ 9.10 WACC Cost of debt 6.0% Marginal tax rate40.0% Cost of debt after tax shield3.6% Cost of equity Risk-Free Rate (rf)2.7% Market Risk Premium (rm-rf)7.0% CAPM Beta1.24 CAPM Cost of Equity11.4% BREW Realized Return21.1% Cost of Equity12.4% Capital structure Debt4.0% Market Cap96.0% Total100.0% Weighted average cost of capital12.0% Business risk premium1.0% Discount Rate13.0%

22 SENSITIVITY Enterprise Value - WACC vs. Perpetuity Growth Rate Perpetuity Growth Rate %3.0%3.5%4.0%4.5%5.0%5.5% WACC 10.0% % % % % % %

23 RECOMMENDATION Add to Watch List PriceWeight DCF$9.1075% Comparable$ % Estimated Price$10.62 Current Price$14.64


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