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Backing a discount retail cash generator

A distributor and manufacturer that sells a range of products to discount retailers and supermarkets has delivered a smart set of maiden results, and has been making some shrewd looking acquisitions, too.
Backing a discount retail cash generator
  • Pre-tax profit surges 21 per cent to £16.4m.
  • Revenue from vaping and sports nutrition segments soar both over 36 per cent.  
  • Earnings accretive small acquisitions.
  • Board eyeing up European expansion opportunities.

Supreme (SUP:203p), a distributor and manufacturer that sells a range of products to discount retailers and supermarkets (B&M, Home Bargains, Poundland, Morrisons and Sainsbury’s are all customers) has produced eye-catching maiden results.

Buoyed by the success of its vaping brand, 88vape, the market leader in the UK with a 30 per cent market share, group adjusted pre-tax profit surged 21 per cent to £16.4m on a third higher revenue of £122m in the 12 months to 31 March 2021. The vaping segment increased revenue by 36 per cent to £39.5m growth (all organic), of which a maiden nine-month contribution from a contract award from HM Prison & Probation Service accounted for £10m of the total and higher margin online sales around £6.5m.

More than 1m vapers now use the product regularly, a price point of 100p per 10ml bottle explains exactly why as 88Vape is by far the most affordable e-liquid brand of scale in the UK – the average price is nearer £3 per bottle across the industry – thus creating a competitive moat in what remains a high growth sector. It’s highly profitable, too, as highlighted by a divisional gross margin of 41 per cent.

Analysts at Euromonitor expect the vaping sector to grow at a compound average growth rate of 11 per cent through to 2024, one reason why house brokerage Berenberg believes Supreme’s vaping segment can grow gross profit by 12 per cent to £18.5m this year to account for half the group total. If anything, that looks conservative given that Supreme will launch in 400 large Sainsbury’s stores in mid-August which will sell the e-liquid in four packs. If successful, a roll-out across the supermarket’s chain of 1,413 stores is the next step.

Supreme’s sports nutrition business has been transformed by last autumn’s £1m acquisition of GT Divisions, a business that markets and sells a range of low sugar high protein bar snacks under the brand of Battle Bites with production outsourced to a third party. The snacks are sold at a competitive price of £1.25, significantly below that of incumbent producer Grenade bars (£1.99 to £2.99). Supreme has recently entered the vitamins market, launching its low-cost supplements online brand Sealions this week and has created another brand, Millions & Millions which launches in September with Davina McCall as brand ambassador.

The small acquisition of sports nutrition and supplements brands SCI-MX and PRO2GO earlier this month is described by entrepreneurial group chief executive and 56 per cent shareholder Sandy Chadha as “the best acquisition I have ever done.” Supreme has purchased £1.3m stock from a business that previously was generating £8.5m of annual revenue and could bring 70 per cent of manufacturing in-house to improve its profitability.

It’s not the only smart deal Supreme has made since IPO in February, the new listing of shares was backed by shrewd fund managers at Slater Investments, Blackrock, Premier Miton, Jupiter and Canacord Genuity. Last month, the group purchased a leading Dublin-based distributor of batteries and lighting products for a maximum consideration of €1.8m, or three times annual cash profit, thus giving Supreme access to the Irish market, the ability to cross-sell its other product categories, and creating an export hub to target expansion in Europe. Chadha is looking at further overseas expansion opportunities in the lighting market. With net debt of £7.5m set to be wiped out this year, the group can easily afford to recycle the strong internal cash flow generated from its asset light business model into more earnings accretive acquisitions.

Berenberg is pencilling in 10 per cent higher adjusted pre-tax profit and earnings per share (EPS) of £18.1m and 13.2p, respectively, in the new financial year, forecasts which look too low in my view, rising to £20.9m and 15.2p in 2022/23. Moreover, with the board committing to a 50 per cent pay-out ratio, there are attractive prospective dividend yields of 3.3 per cent and 3.8 per cent on offer, too.

A forward price/earnings (PE) ratio of 13 for the 2022/23 financial year is low in relation to the earnings growth predicted – 12.5 and 15 per cent, respectively, for the next two financial years – and for a company that offers a free cash flow yield of 7.5 per cent. Trading on five-point discount to its peer group PE ratio average, I reiterate the target price of 250p I outlined when I initiated coverage (Alpha Research: ‘Tap into a discount cash generator’, 27 May 2021). Buy.


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