UMG (United Malt) released a sizeable downgrade today.

Relative to consensus, we are in the order of a 15% downgrade.

It is a good example of how a supply chain woe compounds.

A weak Canadian barley harvest meaning lower quality and quantity, which also rots quicker, causing weaker yields requiring more imports at higher freight costs to produce same/similar units/volume.

That equals costs up, productivity down.

Precisely the sort of environment in which stock-picking is more or less luck of the draw. The share price will be down, and there is good reason to think drivers are temporary, which makes the story interesting.

But the gearing and covenants comment below suggest that one more downgrade, and things get somewhat hairier.

Since the operating environment (most of the sources of the d/g) are beyond their control, they can be pushed towards a situation requiring additional capital. You have to essentially “bet” that things just on average work out a bit better than expected (de-bottlenecking occurs).

One to watch, and whether you take the bet (risk of additional downgrade, requiring a top up of equity due to covenants) depends mightily on how cheap it gets after today.

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