Mac Baren Integration Expected To Generate DKK 150 Million Synergies

Key Takeaways

• Integration of Mac Baren and strategic investments bolster net margins and drive organic growth through cost savings and increased market share.
  
• U.S. retail expansion and new financing initiatives support revenue growth, while discontinuing third-party distribution refocuses efforts on proprietary product success.
  
• The company's revenue and net earnings face pressure from declining U.S. cigar sales, higher interest expenses, and acquisition-related costs, potentially impacting future profitability.

Catalysts

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

• The integration of Mac Baren is expected to generate significant synergies of DKK 150 million by 2027. This will positively impact net margins through cost savings in sales, marketing, and manufacturing.
  
• Strategic investments in machine-rolled cigars and nicotine pouch brand XQS are set to drive organic growth, with price increases and market share recovery improving revenue and net margins.
  
• Expansion in U.S. retail operations, exemplified by opening new stores, aims to enhance revenue growth, leveraging experience-driven consumer spending trends.
  
• The new EUR 300 million corporate bond issuance secures long-term financing and enhances the company's capital position, potentially facilitating future growth initiatives and protecting earnings.
  
• The discontinuation of third-party nicotine pouch distribution impacts current revenue but aligns with the focus on proprietary next-generation products, which are expected to show over 50% growth, enhancing future sales and margins.

Scandinavian Tobacco Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scandinavian Tobacco Group's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.9% today to 11.6% in 3 years time.
• Analysts expect earnings to reach DKK 1.1 billion (and earnings per share of DKK 13.44) by about February 2028, up from DKK 986.7 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 7.9x on those 2028 earnings, down from 8.5x today. This future PE is lower than the current PE for the GB Tobacco industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 5.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.05%, as per the Simply Wall St company report.

Scandinavian Tobacco Group Future Earnings Per Share Growth

Risks

• The discontinuation of the third-party distribution of nicotine pouches in the U.S. is expected to negatively impact net sales growth in the coming quarters, which could pressure overall revenue trends.
  
• The market for handmade cigars in the U.S. is contracting by a mid-single-digit percentage with no sign of stabilization, potentially affecting revenue and leading to a decrease in earnings from this segment.
  
• The EBITDA margin has decreased due to investments in growth enablers and product development, which could impact net profit margins if not recuperated through enhanced revenue or efficiency gains.
  
• The integration process and restructuring costs related to the Mac Baren acquisition, including expected special cash costs of DKK 150 million, may exert short-term pressure on cash flow and overall financial performance.
  
• Increased interest expenses from the issuance of a new corporate bond could raise financial costs, affecting net earnings and reducing the cash available for future investments or shareholder returns.

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 DKK9.4 billion, earnings will come to DKK1.1 billion, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of DKK106.2, the analyst price target of DKK108.5 is 2.1% 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.