Often when governments crack down on an industry, it is negative for most operators.
Not so for FMCG products firm Supreme plc (SUP) who today "welcomed" the UK's decision to ban disposable vapes and implement tougher laws on plain packaging and flavours.
This is because SUP is already best-in-class in terms of both stamping out underage vaping and developing a range of rechargeable and refillable pod systems, which are far more environmentally friendly than single use vapes.
Plus, as the legislation is enacted over the next 12 months, these reusable devices should generate higher gross margins - reflecting their 'razor & razor model'.
Here retailers will be given a 6-month window to prepare for the changes - meaning the new proposals will probably come into force sometime in early 2025.
In the interim, Supreme plc continues to go from strength to strength.
The group adding that Q3'24 trading (ie 3 months to Dec'23) had been "excellent", with FY'24 turnover and adjusted EBITDA guidance upgraded to "at least" £225m (£155.6m LY) and £38m (£19.4m) respectively thanks to "record levels of organic growth" across its own Vaping, Sports Nutrition and Wellness brands and augmented by the 3rd party ELFBAR distribution deal, which "significantly" exceeded expectations.
Elsewhere, I suspect cashflow has also been strong, enabling the Board to announce a £1m stock buyback program over the next 3 months.
Sure, disposables are forecast to contribute £9m of EBITDA in FY'24 on revenues of £75m.
Yet despite this, the FY'25 outlook should be largely unaffected by the anticipated ban since the incoming rules are predicted to cause a temporary spike in demand, as retailers roll out replacement vaping devices (eg pods) and refillable kits. It is thought more than half of the disposable market will ultimately transition to an alternative form of vaping.
CEO Sandy Chadha commenting: "Supreme PLC has been at the forefront of the UK vape market. While the ban on disposables presents challenges, we remain extremely excited by the future. The buyback reinforces the confidence we have in the business across the medium term."
Lastly in terms of upside potential, I estimate the stock trades on attractive FY'24 PER, EBIT and EBITDA multiples of 5.5x, 4.1x and 3.5x, whilst equally paying a 5p dividend (4.3% yield). Likewise, I have lifted my valuation 5% to 235p/share from 225p before.
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