Supreme's bargain brands continue to drive strong growth
As higher interest rates and the cost of living crisis bite into household budgets, more and more UK consumers are opting for trusted, value conscious brands. That includes () affordable, everyday products across Vaping, Batteries, Lighting and Sports & Nutrition.
Today the company posted in line FY23 results and a strong second half, with adjusted EBITDA (excluding £1.5m of share-based payments) and EPS of £19.4m & 11.8p, respectively, on turnover up 19% - or 9% on a like-for-like basis - to £155.6m, from £130.8m last year.
Better still, I estimate adjusted free cash flow (post capex and tax) came in at a healthy £16m, reflecting tight working capital control. In the context of a £122m market cap that's equivalent to a bumper free cash flow yield of 13%. Alongside a closing March 2023 net cash balance of £3.2m (pre-£15m of IFRS16 leases and £4.1m of deferred/contingent consideration), that means a 3.0p dividend per share has been proposed (subject to Board approval) and
Looking ahead, momentum is building too, with FY24 guidance being lifted “significantly” above consensus expectations. That's supported by a new flagship contract to distribute leading UK Vaping brands ElfBar and Lost Mary - which bring £25m-£30m annualised sales and £2m of EBITDA - alongside robust Q1 24 trading for its own Vaping brands 88Vape and Liberty Flights and Sports Nutrition names.
It's true that the UK vaping industry is under pressure to stamp out underage users. But Supreme PLC is best-in-class when its comes to regulatory compliance, not only conducting third-party testing to ensure products are consistently in compliance with all UK laws, but also beginning ‘pre-order’ due diligence across its retail customers to ensure adequate age verification protocols are maintained in store.
In fact, I suspect Supreme PLC's strict discipline played an important role in signing the ElfBar and Lost Mary account.
With regards the valuation, the stock trades on compelling FY 24 PER, EBIT and EBITDA multiples of 7.8x, 5.6x & 4.94x based my upgraded forecasts of £25.6m and 13.5p of adjusted EBITDA and EPS on revenues up +16% to £181m. These attractive ratings represent a material discount to Philip Morris’ ‘non-tobacco’ business of circa 20x PER. As such, I have nudged my sum-of-the-parts valuation again to 195p a share, from 175p previously.
CEO Sandy Chadha commentied: “Supreme has delivered a strong FY'23 performance, characterised by an outstanding contribution from our Vaping division, which has almost doubled revenues."
"Our commitment to providing highly affordable but competitively priced products sits at the heart of our business and our diverse client base continues to provide a stable platform for growth."
"As we look to the future, we remain committed to expanding our product set, both organically and via acquisition, which in turn creates greater opportunities to cross sell and forge ever closer bonds with our customers.”
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