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Distil has been a fantastic investment but it may be time to take some profit

By Gary Newman | Thursday 11 May 2017

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Whilst it is true that a lot of the small companies listed on AIM are total junk, there are also some gems amongst them, and I think that Distil (DIS) falls into that category. I first came across this company at the UK Investor Show a couple of years back and it has performed extremely well since I first covered it as a buy here at around 0.8p - the share price is currently nearly 350% higher than it was back then.

I am still a big fan of this company and the alcoholic drinks that it manufactures, but it has now got to a level where I am seriously considering cashing in on at least some of my holding as it is hard to see it going much higher unless the final results up to the end of March 2017 – due in early June I would expect – are a lot better than expected.

The company has been showing good levels of growth in sales and revenue, and for the last quarter of 2016 revenue grew by 71% compared to the same period in the previous year, with Blackwoods gins and RedLeg rum performing particularly well.

RedLeg is also being launched in the US and that should see a further boost to revenues, plus the products are continuing to prove popular in the UK, with a recent announcement that RedLeg is now being stocked in a major supermarket chain.

The most recent trading update for January until the end of March looked far less impressive though, although that was at least in part due to Easter falling outside of this period, as opposed to being included in the comparable quarter in 2016. This resulted in year-on-year revenue rising by 23% and sales volumes by 25%, and although that is still impressive I would question whether it is enough to justify the rise in market cap which we have seen since then, with another £3.5 million added and taking it to around an £18.5 million valuation.

I would expect to see a net profit reported for the last full year, given that the interims showed that the net loss had reduced to £66,000, and taking into account the increased revenue. Marketing investment has also risen significantly, but that should be more than offset by the effect that it has had on revenues.

I still think that Distil has plenty of potential – especially when it comes to opening up overseas markets, such as the US, as well as increasing in popularity here in the UK – but I do think that the valuation has now got a bit ahead of itself.

It is one of those shares where the company is going to have to grow into its market cap given where it is now, and for that reason I may well take some money off of the table at this level as, barring a spectacular set of financials, it will be trading on a very high PE ratio. Even if you allow for similar levels of growth for the current financial year, it would still be hard to argue that it is cheap at the current share price of 3.75p to buy.

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