Anyone nostalgic for the olden days and steam trains just needs to make friends with some vapers. Apart from fulfilling nostalgic notions of a bygone era, vapers are rapidly creating their own, new bygone era. The era of cigarettes.
The government are in cahoots with these vapers. Supporting them, providing 1m free smoking cessation kits, sending in vapes to His Majesty’s Prisons, and tax too. No horrific taxes for Vaping. Vaping products are subject to VAT at the standard rate of 20%. A reduced rate of 5% can be applied to pharmaceutical products designed to stop people from smoking tobacco and suppliers of vaping products believe that their products should be reduced rated under the same legislation.
A leading player in this space is Supreme.
Supreme produces and sells the 88 Vape, produces Cuts Ice, and also now distributing Elf Bar and Lost Mary.
Vaping is subject to some controversy. Some kiddie winkles are vaping say the media. Some naughty shop owners serrupticiously sell vapes and that’s no crime (that’s a literal fact, not my moral judgment). Lock ‘em up and fine the swines…. that’s my moral opinion on shop keepers. Vapes are just the alcopops of the 2020s. The good news is if Vaping is like alcopops then Supreme is selling the Sherry and the Ginger Wine. In other words, its audience are predominantly middle age and above. It ain’t the ‘ip ‘op kool kid in town. It’s the bargain 99p option for working people. SUP’s CEO makes no bones about supporting legislation on vaping because he knows SUP would benefit. Yet the market is pricing SUP because it believes SUP stands to lose. Despite there being hardly any ‘ip ‘op kid vapers, but plenty of 40-somethings, and the real competition/growth is to convert smokers - not kids.
Controversy, too, over disposables. Again Sandy is ahead of things and is actively looking to provide recycling facilities. If disposable vapes were banned, the evidence suggests that most would switch to refillable/open vapes. Perhaps, too, retailers will offer a filling service. Convenience will always find a way.
Beyond Vaping, Supreme is a one-stop-shop provider to the, err, one-stop-shop. The pound shops as my mum would have said. Six months ago I produced a forecast for FY2024 (to March 2024). “Oak FY2024E”. SUP’s inhouse analyst also produced a forecast. Last week they produced a revised analysis, so I thought I’d do so too.
My initial forecast has proven to be much closer than theirs but how will my new forecast fare? Check back in 6 months or so.
But here is why I believe my forecasts.
1/ Batteries: As can be seen, I believe the revenue is forecast to be static albeit with slightly improved margins due to lower logistic costs and synergies. I do appreciate SUP say “sold organic growth”
2/ Lighting: Again I am assuming slightly improved margins due to logistics costs and synergies. I do appreciate SUP say “sold organic growth”
I based my numbers on what the CFO Suzanne spoke to a recovery of 15% growth in a VoxMarkets interview. 15% growth means it remains well behind its historic FY2022 performance (by about 30%) and they spoke of it “fully recovering” in FY2024 and FY2025. So I’m assuming FY2025.
3/ VAPING: this is where I believe the numbers are understated. Why? Simply this. Take the run rate of vaping in the 6 months to March 2023 and add its historic growth of 19.5%. SUP report “significant growth within our vaping activities” so I believe this approach is fully justified. The inhouse analyst is assuming almost zero growth in its numbers despite, let me repeat it, “significant growth within our vaping activities”. Significant is not zero.
4/ Sports – SUP speak to improvements to margins due to falling costs as well as the rebrand of Sci-Mx. It’s clear SUP are focused on driving growth here in FY2024. Assuming a 15% growth (solid organic growth) and also a slightly higher 21% gross margin (due to Whey prices reverting - it was a 22% GM in 2022). Potentially, this segment could be much higher in FY24, and there was a strong suggestion that an acquisition in this segment is likely too - no numbers are included here for that possibility.
5/ Household and Elf Bar/Lost Mary: Bizarrely, the vaping distribution deal is dumped into the household category by the analyst despite SUP clearly stating they were reporting it as a new and separate category. As they do I am using the trading update numbers although I note they say “at least”
6/ Admin Costs. Originally I used £18.7m which is the FY23 figure of £21.5m less the one off costs of £2.8m. I’ve increased the overhead/admin to £26.5m but I’m baffled quite why the analyst believes overheads are shooting up 50% to over £32m. There’s no indication that this will be the case, and the evidence is that SUP have streamlined their costs not increased them. Even my acceding to £26.5m is done without any basis of fact. I’m simply using the analyst’s original £26.5m figure and will be closely reading the interims for clues why this cost has risen so much. The obvious reason would be the cost of the new, single larger premises in Manchester, although the impression given was that this was cheaper not more expensive because it meant multiple locations could be closed down. SUP run a tight ship - so would they have widdled an extra £11m on some vanity cost? I really doubt it.
Conclusion:
My new estimate of GM (adding the above) for FY24 is £58.6m (was £55.7m and FY23 was £39.6m GM)
And new estimate of adj. EBITDA for FY24 is £32.1m (was £37m and FY23 was £19.4m adj. EBITDA)
This is much higher than the analyst’s adj. EBITDA estimate of FY24 of £21.3m, but close to SUP’s own estimate is £28m-£30m.
A £32.1m EBITDA would equate to a 4%-4.5% yield in FY2024 (40%-50% YOY growth in dividend) based on the 25% of net profit pay out. So in 2 years since they cut the dividend from 50% to 25% to achieve faster dividend growth they're well on the way back to the same dividend payout as before!
At £1.22 this remains incredibly cheap and attractive in my view.
As with all my posts, this is not investment advice. It is written for my benefit, and to set out my investment rationale. I state facts and source them where possible. I also use words like “infer” and “think” which means it’s a reasoned opinion based on facts I’ve found. Investment requires filling in the gaps with inferences and thinking about the facts to form forecasts. I hope you enjoy what I write and find it useful in forming your own investment rationale.