- Overstocking by lighting customers impacts 2022/23 revenue and profit forecasts
- Analysts downgrade 2023 revenue estimates by 10.5 per cent to £129.5mn and earnings per share (EPS) forecasts by a third to 9.3p
- Dividend payout ratio to be cut from 50 per cent to a minimum of 25 per cent of net profit
Supreme (SUP:86p), a distributor and manufacturer that sells a range of products to discount retailers and supermarkets (B&M, Home Bargains and Poundland are all customers), has been impacted by customer over-stocking in its lighting division, as well as a slowdown in consumer sales in this high-margin category.
A high proportion of lighting sales are free-on-board (the vendor records a sale once shipment is made and the product is warehoused) which means that Supreme has long lead times and sales visibility. The over-stocking will take time to unwind, hence why analysts slashed their divisional revenue estimate from £28.3mn to £13.4mn, implying a decline in gross profit from £9mn to £4mn, which feeds through to a 23 per cent downgrade in group cash profit to £17.5mn.
As highlighted in April’s trading update, Supreme is facing headwinds in its sport nutrition business due to the doubling of the price of whey protein carbonate in the past 12 months (‘Geared for growth’, 12 April 2022). This has impacted its gross margin and sales volumes, too, albeit the business has hedged whey purchases for the next six months which offers some protection to profits.
Fortunately, Supreme’s vaping brand, 88vape, the market leader in the UK, continues to perform very well, driven by a combination of new listings (Sainsbury’s and Morrisons) and ongoing organic growth across other discount retailers. Including a £7mn revenue contribution from recently acquired Liberty Flights vaping business, analysts at Equity Development expect the division to deliver 40 per cent higher revenue of £60mn this year and a gross profit of £26.7mn at a maintained profit margin of 44 per cent. On this basis, vaping should account for two-thirds of group profit this year, with Supreme’s solid batteries segment contributing a further 10 per cent.
Investors reacted to the earnings downgrade and the board’s decision to halve the dividend payout ratio in the new financial year to free up cash for acquisitions by marking down the share price by a third. The 2022 payout per share of 6p a share could be cut to 2.3p, implying the shares are trading on a forward PE ratio of nine and offer a prospective dividend yield of 2.7 per cent.
The rating is modest, balance sheet gearing of 12 per cent is low, and the shares offer recovery potential, too. Indeed, analysts at Equity Development forecast EPS bouncing back to 11.7p in 2023/24 when lighting product sales light up again. Hold.
