Mac Baren Acquisition And XQS Expansion Will Strengthen Future Prospects

Key Takeaways

• Strategic acquisitions and investments in new markets are anticipated to drive revenue growth and strengthen market position.
  
• Focus on sustainability and operational efficiencies aims to enhance net margins and long-term return on investment.
  
• Challenges in key markets, increased leverage, and external uncertainties threaten Scandinavian Tobacco Group's revenue growth and financial stability.

Catalysts

Manufactures and sells cigars and pipe tobacco in the United States, Europe, and internationally.

• The acquisition of Mac Baren strengthens the smoking tobacco categories and is expected to contribute synergies of DKK 150 million by 2027, which could enhance future earnings.
  
• The company is investing in new cigar superstores, international expansion of handmade cigars, and nicotine pouch brands, which are anticipated to drive revenue growth and strengthen the company's market position.
  
• Despite challenges in the U.S. market, international sales of handmade cigars have shown consistent double-digit growth, contributing positively to overall revenue.
  
• The nicotine pouch brand XQS is experiencing high double-digit growth in Sweden and additional markets, with expectations to approach EBITDA breakeven in 2025, thereby improving net margins.
  
• Continued investments in sustainability and operational efficiencies are expected to create long-term value, potentially enhancing net margins and return on invested capital.

Scandinavian Tobacco Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scandinavian Tobacco Group's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 11.3% in 3 years time.
• Analysts expect earnings to reach DKK 1.1 billion (and earnings per share of DKK 13.5) by about March 2028, up from DKK 939.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 8.7x today. This future PE is lower than the current PE for the GB Tobacco industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 6.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Scandinavian Tobacco Group Future Earnings Per Share Growth

Risks

• The U.S. market, which constitutes half of the company's turnover, is facing low consumer sentiment, introducing an element of uncertainty about future revenues and growth in that market. This could impact net margins if consumer behavior negatively affects demand.
  
• There are significant pressure and challenges in the handmade and machine-rolled cigar markets both in the U.S. and Europe, with declining consumption in the U.S. and market decline in Europe. These trends could suppress net sales and impact revenues.
  
• The distribution discontinuation of the third-party nicotine pouch product, ZYN, in the U.S. is affecting growth, which may continue to impact revenue negatively until at least the mid-2025.
  
• The leverage ratio has increased significantly due to recent acquisitions, reaching 2.6x, which, combined with anticipated higher net financial expenses, could dampen earnings growth and exert pressure on profit margins.
  
• Overall geopolitical and macroeconomic uncertainties, combined with potential regulatory changes and high competition, create a volatile business environment that could negatively affect financial stability and expected profitability.

Valuation

• The analysts have a consensus price target of DKK108.5 for Scandinavian Tobacco Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK9.5 billion, earnings will come to DKK1.1 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 5.9%.
• Given the current share price of DKK104.2, the analyst price target of DKK108.5 is 4.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.