When ASX share United Malt Group Ltd (ASX: UMG) was spun out of Graincorp Ltd (ASX: GNC) a couple of years ago, it listed with high hopes.
After all, the company instantly became the fourth-largest malt producer in the world with a multinational operation.
Listing on the ASX at the trough of the COVID-19 panic crash, investors were optimistic that its enviable market position, plus global beer and whiskey consumption, would spur growth.
But after opening its first day on the bourse at $3.60, the stock price has largely gone sideways.
United Malt shares closed Thursday at $3.40, which is 5.55% down from that debut price.
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'Beer demand remains resilient'
But for Fairmont Equities managing director Michael Gable, now is the time to buy into United Malt in preparation for a rally.
"Despite inflationary cost pressures, UMG said beer demand remains resilient. Importantly, premiumisation trends remain intact and consumers continue to trade up," Gable said on the Fairmont blog.
"Malt whiskey production is also expected to continue its upward trend and demand for distilling continues to grow given customers lay down spirits for +10 years for aged whiskey."
The ASX stock has already rallied 18.6% since 21 October.
But Gable remains bullish because it still hasn't returned to "normal" earnings and the market has not yet factored in the "the full benefit from improved pricing and commercial terms" due in the 2024 financial year.
"We continue to see potential for further upside in UMG shares," he said.
"The FY24 multiple of ~16.5x is still at a discount to the average [price-to-earnings] multiple over the last two years."
Share price heading up
The other sign that encourages Gable is that United Malt shares seem to have bounced back from a recent trough.
"UMG had been in a downtrend all year, but it is now breaking it."
The analyst thought any dip in the ASX consumer share from here is a buying opportunity.
The business is also reducing its debts.
United Malt management has said in the past that it targets its gearing at a range of 2.5 to 3 times earnings. But as of the end of September, this figure had blown out to 5 times.
"The higher gearing position reflects additional inventory financing associated with importing barley, given the North American drought and the intake of barley for its UK expansion," said Gable.
"Gearing metrics were made worse by a lower AU dollar on US dollar debt on translation."
According to Gable, United Malt is expected to return to the target range during the current financial year.
