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It’s a £2.64 increase because VAT is charged on top of duty.

Will it hurt demand? yes and no. For the physically addicted and habitually addicted its probably not going to do a great deal to demand. They can:

-Try and quit (go cold turkey)

-go back to smoking, however, the government is raising tax on tobacco at the same £ per puff to disincentivise this

-search for another alternative, they could look for cheaper nicotine replacement products.

- Or they can look for cheaper vapes. 88vape is the cheapest out there, so this is potentially an opportunity for those who currently pay £3 per 10ml liquid seeing it go to £5.64.

It is likely to hit demand for new vapers (not former smokers). However, 88Vape primary customers are older users, plus people in prison (Supreme has a contract to supply vapes and liquid to the prisons). The intention of this duty is to disincentivise people to Vape, but to make it more attractive than smoking.

Elfbar and Lost Mary users are younger though.

You can also do your own research on how vaping taxes have impacted other countries.

Here is what was published yesterday by the government, as government documents go, this one is faily easy reading.

https://assets.publishing.service.gov.uk/media/672263b43ce5634f5f6ef582/Vaping_Products_Duty_consultation_response.pdf

UK revenue last year was 70m out of a total of 750m approx, can't recall exact numbers.

So some of that could be taxed higher going forward. There was talk about increasing gambling taxes as part of the budget, so it could be extended to plus igg etc.

Not sure why, Vix is still above average. US election will give some volatility. i dont think the UK budget impacts a great deal, PLUS doesnt get a huge amoutn of revenue from the UK anymore, and the tax is dependant on the local tax jurisdiction.

Any thoughts?

Adding these risks (without double counting) results in a £27 million reduction in NPV, assuming all these events occur simultaneously.

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OPPORTUNITIES

Tax on Liquids

88Vape is the lowest-cost liquid provider. A tax on liquids (up to £3/10ml depending on strength) may encourage vapers to switch to a cheaper brand, making 88Vape the preferred choice. The impact is not quantifiable.

Limited Disposal Ban Impact

While disposables will be banned, it doesn’t mean people won’t buy non-disposables and discard them after use.

The Sandy Factor

Sandy has an excellent track record in acquisitions, with no notable overpayments. The business generates a high return on capital employed in cash, providing ample scope for further acquisitions.

Drinks

There is significant potential to grow drink sales.

For disposables, let’s assume FY 2025 still has GP = £3.4m as the ban isn’t coming in until FY2026. Then assume people stay loyal to 88vape and switch to a pod-based system. Disposables are about 5 times more expensive per puff than pod-based. So GP then is £3.4m / 5. Again, assume the market declines over the next 30 years but prices rise with inflation.

• NPV = £2.7m.

Elfbar & Lost Mary:

• I think it’s fair to assume normalized sales are 2 times what was incurred in the 2nd half of FY23. The logic being in the 1st half when the contract started, there would have been shelf-filling purchases from suppliers rather than replenishment filling purchases, so we can assume a normal year is about £60m (full year Elfbar revenue = £57m, half-year Elfbar revenue = £24.6m). Margin seems to be 13%, giving a starting point of GP = £60m x 13% = £7.8m.

• Disposables are not going to be banned in 2025, so let’s assume 2025 does the £7.8m as well. After which, let’s assume all users of the brand are loyal and switch to Elfbar and Lost Mary pod systems. Again, pod systems are 5 times cheaper than disposables. So our starting point is £7.8m / 5. Again, if we assume vaping is a declining market over 30 years, this gives an NPV = £6m.

Add all of this up and we get to an NPV of £182m, at a 10% discount rate.

Why assume the market declines by 1/30th per year? This seems overly cautious. If the government implements a ban on anyone born after 2009 from buying vapes, similar to their plans for cigarettes, the youngest vaper would still be under 50 in 30 years’ time.

RISKS

Tax on Liquids

In 2026, a new tax on liquids is expected to be introduced, potentially adding up to £3 to a 10ml bottle, which currently sells for £1. This could significantly disrupt our assumptions if it leads to a decrease in vaping. However, I believe that since vaping is cheaper than smoking, it will continue to thrive, and the impact on volume will be minimal. This risk, however, is difficult to quantify.

Elfbar and Lost Mary Contract Loss

This is a new contract, and its duration is unclear. The contract could end abruptly, resulting in a net present value (NPV) impact of £6 million.

Prison Contract

88Vape supplies to prisons, generating approximately £16 million in revenue with an assumed 45% margin, resulting in £7.2 million gross profit annually. Currently, only 88Vape and British American Tobacco supply to prisons. There are likely renewal periods and retenders, and the government prioritizes price over brand loyalty. They could also decide to make prisons vape-free, as they did with smoking in 2016. If this contract ends, the NPV impact would be £19.4 million.

Assumption of Brand Loyalty Switching

I have assumed that all users will switch to the same brand. This might not be the case:

• If 88Vape users don’t switch, the NPV impact is £1.6 million.

• If Elfbar and Lost Mary users don’t switch, the NPV impact is £3.6 million.

For the valuation-minded among you, I’ve delved pretty deep into the business model, read the annual reports, and reviewed all the investor presentations I could find over the last couple of days to come up with this analysis. I welcome all challenges to assumptions and any errors I may have made:

To try and value the business, I have created a discounted cash flow (DCF) to get to the net present value (NPV) of the company:

Assumptions:

• All profits after tax are cash.

• Discount rate of 10%.

• Tax rate is 25%.

• Overheads are equal across all divisions and are 55% of gross profit (this seems to be what they are historically).

Batteries:

• Achieved £5.6m gross profit in 2024, and £3.9m in 2023. For prudence, let’s use the 2023 figure of £3.9m and assume it stays the same indefinitely. I have not uplifted this for inflation as it seems to be a declining market, although Supreme is growing its market share.

• Discounted net present value after 30 years: £12.5m.

Lighting:

• Gross profit (GP) is a bit up and down over the last 3 years, so let’s take an average as the starting point: £6.5m. Let’s assume the market grows with inflation of 2.5%.

• NPV after 30 years: £26.5m.

Sports and Nutrition:

• 2024 GP = £5.1m since raw materials prices have stabilized. Assume the market grows at 9% for 10 years (which is what Google tells me the market is growing at), and after 10 years it grows in line with inflation of 2.5%.

• DCF = £32.9m.

Drinks:

• Achieved £1.8m operating profit before it was acquired. Let’s assume £200k of synergies, for a starting point of £2m. Assume it grows by 7% per year for 10 years as Supreme cross-sells existing products, then grows at 2.5% inflation.

• DCF = £10.4m.

Branded Distribution (not Vapes):

• 2023 GP was £0.815m. We don’t have the figure for 2024 as it is lumped in with Elfbar & Lost Mary Distribution. Assume the £0.815m grows with inflation (it’s a mature market).

• DCF = £3.3m.

So, before anything to do with Vapes, that gives us a prudent NPV of existing businesses of £85.6m over a 30-year period, discounted at 10%.

Core Vapes:

• Supreme achieved £82.8m of revenue and £36.0m of gross profit in 2024. Let’s split it between disposable and non-disposable.

• In the accounts, they tell us about the split, and Sandy has mentioned the margin on liquids is double that on disposables, so we can infer:

o Non-disposable revenue = £69.1m, GP = £32.6m.

o Disposable revenue = £13.7m, GP = £3.4m.

For non-disposable, let’s assume FY 2025 delivers the same GP = £32.6m, then the market declines 1/30 over the next 30 years, but sales prices rise with inflation.

• NPV = £88m.

For disposables, let’s assume FY 2025 still has GP = £3.4m as the ban isn’t coming in until FY2026. Then assume people stay loyal to 88vape and switch to a pod-based system. Disposables are about 5 times more expensive per puff than pod-based. So GP then is £3

Is the accounting error the driver? Possibly indirectly because it looks like slowing growth at first glance, but I don't think the error itself is a an issue personally.

If the price doesn't come back up it's more likely the effect of trophin lack of any growth.

Tau is promising though

On closer examination the sell off looks over done, if the revenue error was no made the revenue growth would be 10% YoY, as would the profit.

The add back the write off of the investment and the profit growth YoY is 12%.

Dropping like a stone!

Not a bad set of results. Cum

Huge slow down here.

Update, the £120 of sales a month stated on the website cant be correct, other parts of the website (including a video) talk about 5m bottles sold a month

@bangrak, regarding profit when disposables are gone.

Out of the 83m of revenue in the Vaping category, only 13.7m of this was from disposables,.

88vape stockists can expect to earn gross margins of 40-50%

liberty flight stockists can expect to earn gross margins of up to 70%

Supreme earns circa 40% gross margin on its vapes, when stockists are able to earn this much i assume even on just the liquids or the pods the margin is in this region.

88vapes are also putting their price to end customers up to £1.20 soon (last update said it was october but i don't think its happened yet. Albeit i believe the revenue from 88vape is actually pretty small. Their website thats aim at potential stocks says they do £120k of sales a month. i assume thats sales to end customer, so take off VAT, 40% margin to stockist, and 40% margin to supreme and thats only a couple of million of revenue.

Has anyone seen any information around how long the contract is for, or when the renewal date is for the " master distributor" contract?

Does anyone know what Master distributor means in regards to elfbar and lost mary?

Does they simply get the stock elbar and lost mary stock from their supplier and simply distribute it to the shops in the uk. Or do they manufacture the products in house?

While war is bad, why couldn't Israel attack when stock markets are open? No one trade at the weekend so there is no initial knee jerk moves in the different markets.

What could be interesting is whether pod systems are treated as disposables anyway.

On 88 vapes website you can get 3 disposables for a tenner.

They are currently selling a non disposable for £4.50.

Now if it comes fully charged is someone who uses it on a night actually going to treat it as a rechargable?

Https://www.equitydevelopment.co.uk/research/supreme-plc-investor-presentation-fy-results-july-2024

Margin impact was asked and answered here in the q and a, the pods will be higher margin, the device lower margin. Net impact expected to be the same.

So in answer my question, no one else tries to make Supremes products more prominent in shops?

Does anyone else do this to boost visibility of Supremes products in the hope it ultimately affects the share price.

When shopping in Sainsbury's, go to the health and nutrition section (protein powders). Pick up a packet of Sci Mx, pretend to read the label, then put it on a shelf but blocking a competitor product. Repeat a few times until half the protein section is full of Sci-Mx?