Roy.E's (LinkedIn) Investment Manager, very good read!13 Apr 2022 10:16
Now. It is not very often that we will revisit information about a shareholding where we have interests, but in the case of Supreme Plc #SUP, which I noted yesterday their trading update yesterday, we will do so.
The share price dropped around 16% yesterday and not sits around 157p this morning. Smaller investors in this business appear to have misread the long term prognosis. Thankfully, this has presented an opportunity that we had no choice but to exploit yesterday and we added significantly to our investments here.
A wise Investor once said that the Stock Market is a device for the transfer of money from the impatient to the patient.
Firstly, analysts at Equity Development reminded investors that the update indicates FY22 performance in line with their forecasts and revenue estimate of £130.0m is revised to £130.4m.
They remain fundamentally positive for growth prospects in Supreme’s leading Vape division where they expect the contribution to gross earnings to have risen from 45.1% in FY20 to just under 60% by FY24, propelling an increase in total (pre-forex) gross margin from 28.0% to 30.5% over the period. Importantly, their fair value remains with our own view point from 230p (Equity Development) to 250p being our 2024 view point.
The whole focus of a shorter term view seems to anchor around the 46 per cent spike in the cost of whey protein concentrate in the 12 months to end January 2022, and general cost inflation (transport and wages).
Longer term, we think of the investment case around Supreme’s vaping brand, 88vape, the market leader in the UK with a 30 per cent market share, this delivered 10 per cent sales growth in the latest financial year to account for a third of group revenue and an estimated 53 per cent of gross profit and is set to continue rising.
The performance was buoyed by new listings in Sainsbury’s and Morrisons, as well as ongoing organic growth across other discount retailers. The directors are guiding investors to expect the double-digit growth for this category to continue.
Also, no attention was paid to the batteries and lighting divisions.
Supreme sells globally-recognised brands such as Duracell, Energizer and Panasonic, and supplies lighting products exclusively under the Energizer, Eveready and JCB licences across 45 countries. Combined these two segments account for a third of group gross profit. This requirement is not going away any time soon and demand will increase through certain segments.
Missing factors in short term investors minds are that adjusted pre-tax profit and earnings per share (EPS) will still both increase 8 per cent to £19.3mn and 13.5p, respectively, thus underpinning forecasts of a 7.3p a share pay-out.
For us, the shares are rated on a forward PE ratio of 11.6, PEG of 0.3 and offer a prospective dividend yield of 4.6 per cent. The £8.4mn cost of the dividend is covered more than two times by £17.9mn (15.5p a share) of estimated free cash flow.
Sign In
Follow the stocks
