- Annual revenue up 19 per cent to £155.6mn
- Analysts push through 13 and 10 per cent cash profit upgrades for next two years
- Appointed master distributor for vape brands, Elfbar and Lost Mary
- Current year PE ratio of 9.2 and forward dividend yield of 2.7 per cent
Supreme (SUP:117p), a consumer goods manufacturer (B&M, Home Bargains and Poundland are all customers), has upgraded profit guidance again, having previously forced analysts to raise their estimates at the pre-close trading update (‘This once recovery play is now a solid buy’, 17 April 2023).
The strong sales momentum is being driven by the group’s high margin vape division. This area is responsible for a 75 per cent increase to £76.1mn and lifting gross profit by almost half to £28.1mn, accounting for almost 70 per cent of group profit. Around £12.8mn of the £32.6mn divisional incremental revenue came from the earnings enhancing acquisitions of vape brands, Liberty Flights and Cuts Ice.
Divisional gross margin contracted from 44.7 to 36.9 per cent because the launch of disposable vapes boosted sales by £12mn but generated a single-digit gross margin. Finance director Suzanne Smith is targeting a 20 per cent margin on disposable vapes as sales scale up and believes that a divisional margin of 37 per cent is sustainable. Importantly, they are not cannibalising e-liquid sales. The vaping business, which owns market leader 88vape, is also benefiting from supportive UK government initiatives, such as the national ‘swap to stop’ scheme, that are targeting safer alternatives for nicotine consumption.
Supreme’s reputation in the industry has enabled it to win a major distribution agreement, announced alongside the results, with the UK’s leading vaping brands, Elfbar and Lost Mary. The group will supply their vape products to some of the UK’s largest retailers, including Tesco, Morrisons, One Stop and WH Smith Travel. The agreement is expected to generate £25mn to £30mn of annual revenue and £2mn cash profit in the 12 months to 31 March 2024. It will enable Supreme to cross-sell its entire product range into an enlarged distribution network, too.
Improved prospects for laggard divisions
The performance of the vaping division was not enough to make good the previously announced shortfall in other parts of the business, as well as cover the £6.7mn increase in group administration costs, hence why adjusted cash profit fell eight per cent to £19.4mn on 19 per cent higher revenue.
It was caused by last year’s customer overstocking and slowdown in consumer sales in the lighting category, which more than halved its gross profit to £4.1mn, and raw material price inflation in whey protein – a staple ingredient for fitness supplements – that impacted margin in Supreme’s sports nutrition and wellness business.
Chief executive Sandy Chadha told the IC that 50 to 70 per cent of the whey protein carbonate price inflation has now been recovered, suggesting last year’s £0.9mn hit to divisional gross profit should now start to reverse. Smith also points out that Supreme now has access to the EPOS and stockholding data of its largest customers, so is now able to measure and forecasts demand more accurately. Reassuringly, she revealed that one of the group’s biggest lighting customers has started to re-order again.
Lowly rated recovery play
Analysts at Berenberg have taken note, raising their current year cash profit estimates 13 per cent to £25.4mn and upgrading their 2024/25 forecast by 10 per cent to £27.3mn. On this basis, expect 30 per cent growth in pre-tax profit to £19.8mn, rising to £21.3mn the year after to produce earnings per share (EPS) of 12.7p and 13.7p, respectively.
The board are committed to paying out 25 per cent of net profit as dividends, declaring a 3p per share dividend for the year just ended. Based on the above EPS estimates, Berenberg forecast payouts of 3.19p and 3.42p for the next two years.
Trading on a modest forward PE ratio of 9.2 and on 5.9 times cash profit estimates to enterprise valuation, offering a 2.7 per cent prospective dividend yield and priced 40 per cent below PMH Capital’s 195p-a-share sum-of-the-parts valuation, shares in this lowly rated recovery play are well worth buying.
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