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1. No date has been set for the vape ban ("sometime" in 2025 "maybe" plus 6 month consultation period)
2. A drop in revenue post-ban is clear but I can't see any discussion on effect on gross margins (currently at 41% by segment P.12 HY Sep-23). The shortfills are clearly cheaper to produce because they don't contain sensor, aluminium shell, heater, copper wiring or battery. Therefore while a drop in revs is clear (when/if it happens), effect on gross margins is likely to be much more limited. Kind of important to take this in to account when looking at growth going forward....right...?
Doesn't really answer my question, even when all this transpires, the company is still reasonably priced. Cash generated now and next year funding M&A in Nutrition to recover some of the lost revenue should be in place by 2024, if this doesn't happen then, yes I will start feeling down beat about this business but until then, it has huge potential as a strong recovery play.
Btw, 16M investment every year for Elf bar is based on the scale of the opportunity, when that shrinks, the investment will also be scaled back. It's not good business not to scale back and I don't think Sandy is too naive.
> After disposables are banned their revenue will be: £5.8m
* Presuming the majority of users switch over to the significantly less profitable re-usable. Which might not even be the case if a large % of sales come from underage teens which I have no idea if they do or not.
They had: £34.4 sales in disposable vapes in FY 24 hy1
After disposables are banned their revenue will be: £5.8m
So that would reduce FY21 revenue from £105m to £76m.
Or £152m for the TTM if disposables are taken out of the equation.
So they keep upgrading guidance but it's pretty meanginless because it's due to the disposables being frontloaded by elfbar and maryjane and a temporary boost.
This is a big hit to revenue when the ban happens. I imagine that margins on disposables are higher than refillables too so probably hits the bottom line a lot more too.
Equity developments just take management comments at face value each time, they are pretty useless imo.
This is a good discussion, and I agree with Bangrak about the earnings hit once disposables are gone.
Even if 70% switch over like Sandy said in the earnings presentation, this doesn't mean they won't have a huge hit to earnings and margins given that disposables are much higher margin %.
A couple of things that are concerning me from the earnings call: https://www.youtube.com/watch?v=c2Kq5hBN64Q
- CFO had no idea how much the impact would have if disposables are banned when an investor asked the question. So seems like they don't even have good visibility on it: https://youtu.be/c2Kq5hBN64Q?t=1548
- ELFbar has been a significant working capital capex investment by supreme of £16m in this year. The CFO said that continued working capital investments into ELFbar would be needed (I have no idea how much).
She also essentially said that ELFbar could be hit with legislation that means much less gross profit contribution from it.
ELFBar only generated £2.8m in gross profit in the trailing twelve months: https://youtu.be/c2Kq5hBN64Q?t=1293
So it seems like a large % of gross profit comes from disposables for ELFBar, £16m investment (and continuing but probably much less £m in following years) for a return of £2.8m gross profit which will likely have a massive drog after the ban takes affect doesn't seem like a good/prudent investment to me.
Bangrak, I understand your logic for loss of earnings from the vaping division, but I am not understanding your reasoning for this down bead narrative.
Going by your assumptions on vaping, which I broadly agree with, there will be around 85% loss of earnings for FY2025 in vaping division, which based on HY2023 figures (I am taking these as this figure will be closer to the median as FY2023 figures will be boosted by the elf bar deal which I consider as a blip, more on this below) will mean gross profit coming down from 34.4M to 5.4M. Assuming all other divisions to remain the same and pull in the same revenue, we are looking at 26.3M gross profit, 12M net profit, and 9M net profit after tax for FY2025. On current valuation, this will give SUP a forward PE multiple of 16.7x for 2025, which is comparable to industry average of 15.5x – Current PE is 6x.
I don’t think it will be hard for people to understand why Elf bar were so keen to increase their distribution in UK and what was the logic of SUP to bid for it. They just want to sell as much of it as possible before the ban hits, as we can already see, this will result in surge in cash generation, which will continue for the next year as well. So, by the time the above scenario materialises the company will be cash rich, which as we can already see it wants to deploy in M&A for the nutrition division and drive growth.
This will be one of the better times to be in the nutrition business, the next in line to be standardised is the ultra-processed food industry and all the sweets and fat selling guys, which is leading to high obesity in children/adults. A brand with high protein food will do well and retail space is available for SUP to capture. With cash and operational leverage (they already have retail clients and all the infrastructure) the probability of success is high, hence for me the future is good for SUP.
Just going by fundamentals, under current market conditions, a cash generating profitable business should be valued more than the market average multiples. Only thing that was stopping big money to invest was the uncertainty around the legislation, with that cleared and all the factors and timelines clear, that money is moving in, SUP has only bought 75,000 shares, rest is being purchased by someone else!
Keen to hear your thoughts.
The information below can be found on the internet takes 5 minutes.......
Average vaper puffs 135-150 day over a year this is 54750 puffs
LM/disposable sales would be 91 units to hit their 54k puffs or £546 (600 puffs 91 units @ £5.99)
Pod system & juices 1.82 units to hit same puff level or £91 (30k puffs 1.82 units £50
How will 70% or even 40% of revenue be retained in disposables with an 83% drop to hit the same puffs?
I think it's wise to pay attention to whatever anyone says when they offer research, i wouldn't ignore what a broker says but the assumption with some brokers is that SUP has this loyal customer base who will just go ahead and buy the pod systems and juices from them having been loyal lost mary vapers, i call it softening the blow. Your individual who has been buying disposables almost certainly has a pod system already and buys juices from a local shop on some backstreet or via the web. I guess the pause in buybacks above 120p might suggest that the future is not as great as the paid brokers make out. When i came back to the UK last summer for a visit, i was amazed how in 1 year almost everyone i knew was puffing on vapes especially disposables lost marys......everyone whom I'm in contact with who was a Lost Mary vaper has stopped using them anyway and just uses refillable pods they already owned. This significant switch that's expected isn't what is being made out IMO. I think a 15% disposables sales to pod systems and juices allows for the vastly different price-to-puff ratio of disposables, the lost mary fad ending, and it considers that most disposable vapers already have pods.
Zeus and Equity Research are payed for by Supreme to appeal to retail investors, I wouldn't pay any attention to their reports personally, obviously they have a conflict of interest.
Bangrak,
Zeus put the difference at a more realistic 40% - see:
https://theoakbloke.substack.com/i/141159396/disposed-to-change
Ticking up nicely... finally!
where does anyone think this will end up after the buy back complete?
Share buy back under way. Anyone selling at these prices need their bumps feeling!
Well I called it correctly in my post and added £10k at 95p, missed the 92p low point. Company is twice the size it was but half the share price.
Good to see you've upped tour forecast, Bangrak. You said 130p max the other day...
"For FY25 we assume that 70% of Supreme’s revenue from disposable vapes will transition to reusable pod system and refillable 10ml devices"
How is this possible?.........A Lost Mary costs about £5.99 it provides about 600 puffs or 99p per 100 puffs.
A pod system with 100ml Lost Mary nic salts & enough pod replacements (6) (can be bought anywhere) costs £50 & gives 30k puffs or 0.16p per 100 puffs. The Lost Mary disposable vaper spends £299 not £50 to get the same intake. Even if 100% disposable switch to pods with SUP the revenue is 80+% less anyway. Realistically they should expect 10% of disposable revenue will be retained by pod/salt sales. The loss of disposables is a significant loss of income everyone knows this, these lost mary vapers in shops won't be rushing to SUP to buy their POD as expected. 130p-150p
"Trading update: an excellent quarter" - full PDF research report (free & accessible) is here: https://www.equitydevelopment.co.uk/research/trading-update-an-excellent-quarter
In a Trading Update for the 3 months to 31 December 2023, Supreme reports “excellent trading performance” during its traditionally busiest quarter, leading to the expectation that FY24 revenue should be at least £225m with (adj.) EBITDA of at least £38m (our estimates were £221.2m and £33.5m). Supreme highlights in particular the success of ElfBar distribution revenue and the Vaping division as a whole, plus growth in Sports Nutrition & Wellness.
The Group also notes the UK Government decision to ban disposable vaping devices and will work to manage a seamless transition to alternative ‘pod’ devices which retain a major role in reducing tobacco smoking.
Supreme also announced a £1.0m share buyback programme to be conducted over the coming three months. Our Fair Value remains 225p/share.
I don't know what's more baffling, the current share price after continual good news or the fact nobody is talking about this company! I'll continue to load up at these levels until the market finally wakes up
Amazing numbers, should be back over 200p when markets wake up to undervalued well run companies.
I was thinking 18+ years as young people.
The CEO states Gen X is the key demographic for 88 Vape. 38 - 52 years I believe.
Its newly managed product Elfbar, on the other hand, with flavours like Strawberry Icecream and Cotton Candy seems a different story.
https://www.elfbar.co.uk/elf-bar-600-disposable-vape-20mg
On a Mg for Mg basis the economics are that refillables sell for about 50% of the price of disposables; however the marginal cost is correspondingly lower (for batteries for exmaple). Zeus' analysis put it at about 11% lower EBITDA on the loss of disposable sales replaced with refillable sales.
That may be true. They have previously stated that sales to underage (young?) persons makes up only a small part of overall sales.
Precisely feeks.
Also it's my impression that a much greater number of young people use disposables than the Gen X folk - who are SUP's key demographic.
It says disposable so won't this just increase sales of more expensive nin-disposable product?
similar to the future of bats and imb touring vapes will replace ***s. i guess all will adapt to a send back your empties for refills or similar. there will be a phasing in period so inventory can be used and also customs and police need to clamp down on the illegal stuff effectively. i think bigger picture this lowly sp is a good price point to buy in a well run company.
Supreme derived c.69% of H1 revenue from its own brand and Elf Bar vaping products.
As said previously anyone still thinking 200p is achievable including equity development needs to be honest with themselves & do the maths. 130p is the max here for a while stripping out the disposables. Very hard to replace that lost revenue. Interesting to see how they deal with this "expected" event.
Ouch. Can see a bad few days here.