35,000 people die annually in the UK from lung cancer, of which roughly 80% are caused by smoking - a tragic loss of life, which further costs the NHS £9,000 a year to treat each patient according to Cancer Research UK.
In response, the government is handing out 1m free vaping devices in order to help smokers quit, since people are twice as likely to give up tobacco by using e-cigarettes as opposed to other nicotine replacements such as patches or gum.
So, why is this interesting?
Well today 88Vape and Liberty Flights brand owner Supreme (SUP) reported that FY 2023 vaping sales had climbed 73% to £75m (from £43.4m last year) as it increased market share through organic and acquisitive growth.
Better still, the division generates high gross margins - around 38% in H1 23 - and is strongly cash generative. Augmented by low capex requirements and tight working capital, that meant Supreme's net debt declined to an estimated £5m (pre IFRS16) by the end of March 23, or less than 0.3x EBITDA.
Similarly, group FY23 turnover and adjusted EBITDA came in “comfortably ahead of expectations” at £150m (+14.6% year on year and ahead for the forecast £138m) and £19.3m (estimate £18.5m) respectively. That was thanks to a standout performance in the seasonally stronger second half, which delivered revenues of £91.5m, and EBITDA of £13.1m at a margin of 14.3%. That was despite incurring Covid induced input inflation, particularly for whey powder, and retailer overstocking within its Nutrition and Lighting units, which are now recovering.
What’s more, CEO Sandy Chadha expects this momentum to continue, with the company guiding towards a “slightly” better than anticipated FY24, where the consensus currently stands at £22.2m of EBITDA on £150.2m of turnover.
But that’s not all.
Supreme possesses an enviable UK distribution network, a rapidly expanding online direct-to-consumer platform and robust pricing power across vaping, sports and wellness. The management team is also laser focused on supply chain efficiencies, with a new state-of-the-art distribution hub in Trafford Park, Manchester set to open in mid-23.
At 100p, the shares trade on compelling FY 2024 PER, EBIT & EBITDA multiples of 8.6x, 6.4x and 5.4x, respectively whilst offering a 3% dividend yield (3p). That's a material discount to Philip Morris International’s vaping / non-tobacco business that I estimate is rated at 20x PER.
As a result, I have nudged up my SOTP valuation to 175p a share, from 169p previously (see chart), which compares to Berenberg Capital Markets’s and Equity Development’s previous price targets of 170p and 180p.
Preliminary results are scheduled for 5th July 2023.
