September 24, 2017 - 4:36pm EST by
2017 2018
Price: 1.32 EPS 0 0
Shares Out. (in M): 164 P/E 0 0
Market Cap (in $M): 217 P/FCF 0 0
Net Debt (in $M): 35 EBIT 0 0
TEV (in $M): 252 TEV/EBIT 0 0

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Castle Brands Inc. (“Castle Brands”, “AMEX:ROX”, or the “Company”) develops and markets beverages including rum, whiskey, liqueurs, vodka tequila, and Goslings Stormy Ginger Beer. The most significant assets/brands owned include: (i) an 80.1% controlling interest in Gosling-Castle Partners Inc. “GCP” which has the exclusive long-term export and distribution rights for the Goslings rum products for all countries (other than Bermuda) and is also the exclusive global distributor of Goslings Stormy Ginger Beer, an essential non-alcoholic ingredient in Goslings trademarked Dark ‘n Stormy® rum cocktail; and (ii) 100% ownership of a collection of bourbons/whiskey brands including Jefferson’s bourbons and rye whiskey, Clontarf Irish whiskey, and Knappogue Castle whiskies. Fiscal 2017 (ended March 31) consolidated revenues totaled $77 million and adjusted EBITDA was $5.2 million. LTM consolidated revenues (June 30) were ~$81 million with 420,000 nine-liter cases of alcoholic beverages sold and 1.5 million of Goslings Stormy Ginger Beer.

A couple of issues make this investment somewhat dicey, so let’s mention them first (in case you want to stop reading):

  1. Castle Brands is a Dr. Phillip Frost controlled company (one of the VIC board’s favorite personalities).  Frost is (i) a director; (ii) owns 33.5% of the total Company shares through related entities such as Frost Gamma Investments Trust and Frost Group, LLC; and (iii) a lender.  Related party transactions abound.  Select transactions involving Frost include loans to purchase bourbon inventory, a promissory note issued in March 2017 to Frost Nevada Investments Trust totaling $20.0 million at an 11% interest rate which was used to finance the purchase of an additional 20.1% equity interest in GCP, and an October 2013 purchase of 5% Convertible Notes (notes are convertible at a conversion price of $0.90 per share).  Yes: it is entirely possible this Company is basically a vanity project (or sorts) for Frost perhaps in similar style to Steinberg’s Crimson Wine Group, Ltd. (OTCPK:CWGL).

  2. The most recent CapIQ transcript is from 2008; however, management does make appearances at investment conferences.

  3. The balance sheet is highly levered and ROX is barely operating cashflow breakeven (although “adjusted EBITDA” margins per management have improved significantly since 2013 and are trending in the right direction).  At June 30, 2017, the Company only had $433,234 in unrestricted cash (and another €310,310 or $354,042 of restricted cash held by a bank in Ireland as collateral related to their revolving credit facility). Debt at June 30 totaled $36 million and was composed of:

    1. Foreign revolving credit facilities ($22,721)

    2. Note payable – GCP note ($214,225)

    3. Credit facility ($13,881,602).  There is approximately $5,118,398 in potential availability under the Credit Facility.

    4. 5% Convertible notes ($1,650,000)

    5. 11% Subordinated Note ($20,000,000)

We expect the Company will have to raise equity unless the there is a dramatic improvement in operating results. The 11% Frost provided Subordinated Note is due March 15, 2019.  We assume he is probably happy with the arrangement.

  1. Market cap is small (~$215 million) with light trading volume and limited float.

So What’s to Like?

  1. In March 2017, Goslings Stormy Ginger Beer was added to the mixer section in approximately 4,500 Walmart stores in the U.S.  We expect the expanded distribution to significantly increase sales.  Shares jumped from $0.80 to $2.20 on the back of the Walmart news and are now ~40% off the highs.

  2. The Company is materially undervalued based on M&A comparable transactions and publicly traded comps. Public drinks companies trade at 5x -6x TEV/revenues and 16x - 20x EBITDA.

Exhibit 1: Publicly Traded Comparable Transactions

Source: Capital IQ and Company Filings.


Private M&A transactions are typically done at 7x-9x revenue multiples (although industry insiders prefer a metric knows as “CAAP” - Contribution after Advertising and Promotion expenses). Generally, most small liquor companies are cashflow negative and are purchased off revenue multiples (or CAAP) as material synergies with potential acquires exist including (i) decreasing COGS; (ii) increasing FOBs, and (iii) reduced selling and other G&A expenses.  A few recent representative whiskey transactions include:

    1. October 2016: High West Distillery purchased by Constellation Brands for $160 million (~9.0x revenues). Utah-based High West has grown double-digits annually over the past three years and now sells about 70,000 nine-liter cases annually.

    2. March 2015: Angel’s Envy purchased by Bacardi for ~$100-150 million (7.5x-8.0x revenues). At time of sale, Angel’s Envy sold 45,000 nine-liter cases in 2014 and was projected to sell 65,000 cases in 2015.

    3. March 2014: Campari acquired Forty Creek Distillery Ltd. from John Hall for CAD 200 million (5.8x revues and EBITDA multiple of 14.5x latest estimate of 2014).

    4. January 2014:  Suntory Holdings Limited acquired Beam Inc. (NYSE: BEAM) for US$16 billion (over 20x Beam's EBITDA for the 12-month period ended September 30, 2013 and 6.1x revenues of $2.6 billion).

    5. April 2009: Gruppo Campari acquired Wild Turkey from Pernod Ricard, for $575 million (9.7x the historic CAAP and 12x the expected EBITDA in the first 12 months following the deal’s closing).  At time of sale, Wild Turkey was a global brand with a total volume above 800,000 nine-liter cases.

As a note, most of these transactions are typically done with limited disclosures, so some of these figures are based on industry articles and estimates.  Also, I think 9x is somewhat high compared to historical ("normalized levels").

Exhibit 2: Select Distillery M&A Transactions

Source: Capital IQ and Company Filings.


A few more details on the products:

Goslings rums include Goslings Black Seal Dark Rum, Goslings Gold Seal Rum and Goslings Old Rum. The Gosling family produces these rums in Bermuda, where they have been under continuous production and ownership by the Gosling family for over 200 years. The Goslings rum brands accounted for approximately 24% and 26% of Castle Brands’ revenues in fiscal 2017 and 2016, respectively.   Shipments of Goslings Rums in the U.S. (~75% of total cases sold) increased 8% to 135,000 cases in fiscal 2016, compared to 125,000 cases in fiscal 2015. In Fiscal 2017, total case sales were flat globally, but the average price per case increased by almost 10% to $260.

Global shipments of Goslings Stormy Ginger Beer increased 56% to 1,115,000 cases in fiscal 2016, compared to 715,000 cases in fiscal 2015.  Cases sold in Fiscal 2017 increased another 24% from 2016 levels to 1,387,880 cases.  

Castle Brands develops and market four premium, very small batch bourbons: Jefferson’s, Jefferson’s Reserve, Jefferson’s Ocean Aged at Sea and Jefferson’s Presidential Select. Each of these four distinct premium Kentucky bourbons is blended in batches using select barrels of certain mash bills and ages to produce specific flavor profiles. The Company also markets Jefferson’s Straight Rye Whiskey, a premium whiskey distilled from 100% North American rye, Jefferson’s Chef’s Collaboration, a blend of bourbon and rye, Jefferson’s The Manhattan: Barrel Finished Cocktail, a ready-to-drink cocktail, Jefferson’s Wine Finish Collection, bourbons aged in wine barrels, and Jefferson’s Wood Experiment, innovative wood-finished bourbons. Shipments of Jefferson’s Bourbon are slightly over 50% of total Whiskey cases sold.  In Fiscal 2017, whiskey cases sold totaled 109,000 and roughly flat from 2016 levels.  

Exhibit 3: Castle Brands Financial Highlights

Source: Capital IQ and Company Filings.



On a simple approach, deconsolidating the current revenues for the 80.1% interest in GCP suggests ROX revenues are approximately $73 million.  Applying the private market multiples of 6x-9x suggest a total enterprise value of $400-650 million which is 65-150% above current levels.  Alternatively, in March 2017, ROX (i) paid $20,000,000 in cash and (ii) issued 1,800,000 shares of common stock of Company stock to purchase another 20.1% equity interest in GCP (bringing the total ownership to 80.1%).  Total consideration paid for this stake (~$22 million) suggests a value for the total GCP stake of ~$90 million.  Thus, is the remaining whiskey and other liquors worth more than $162 million?  The Whiskey sector generates $28 million of revenues, so that would represent a 5-6x revenue multiple, which again, would be at the lower end of private market historically sales.  In addition, at these prices, you would get the remaining $10 million in revenues from other liquors (Vodka, Tequila, etc.) for free.  Finally, we do expect growth from the new distribution agreement with Walmart for Ginger beer, which is not modeled into the current valuation or forecasts, but does provide upside optionality.

Exhibit 4: Valuation Sensitivity Table: Price


Exhibit 5: Valuation Sensitivity Table: Return


Source: Internal Estimates.


Source: Internal Estimates


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Improved revenues/earnings from Walmart agreement; M&A; de-leveraging

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