With The Acquisition Of Clearly Drinks, New Opportunities Will Arise, But Future Vaping Regulations May Pose Challenges

Key Takeaways

• The acquisition of Clearly Drinks offers growth potential in Soft Drinks through strategic synergy, enhancing revenue and profits with higher-margin opportunities.
  
• Supreme's strategic actions in vaping maintain stability and growth by aligning with market trends, improving margins, and capturing opportunities amidst industry changes.
  
• Regulatory changes and market fluctuations could negatively impact revenues, margins, and growth prospects across multiple segments like Vaping and Wellness.

Catalysts

Owns, manufactures, and distributes batteries, lighting, vaping, sports nutrition and wellness, and branded household consumer goods in the United Kingdom, Ireland, the Netherlands, France, rest of Europe, and internationally.

• The acquisition of Clearly Drinks presents a strategic catalyst for growth in the Soft Drinks sector, leveraging cross-sell opportunities and operational synergies with Supreme's existing customer base. This is expected to enhance revenue and margin expansion given Clearly Drinks' higher margin profile.
  
• Supreme's proactive adjustment in the vaping segment, like reducing disposable SKUs and introducing 4-in-1 high puff products, aims to recover revenue lost from declining disposable sales. This strategic pivot could stabilize earnings by aligning with market trends and increasing margins as the new products are anticipated to be higher-margin.
  
• The move to the Ark facility underscores Supreme's operational efficiency focus, enabling cost-effective growth with a large warehousing space and improved logistics. This centralized operation is likely to contribute positively to net margins through cost savings and streamlined operations.
  
• Supreme's cash position, boosted by self-financed growth and absence of bank debt, empowers the company to explore value-accretive M&A opportunities. This financial flexibility can potentially drive revenue and EPS growth through acquisitions and diversification.
  
• Future regulatory changes in the vaping industry, including potential tax modifications, present both challenges and opportunities. Supreme's early adaptation and strong market position could lead to increased market share and pricing power, potentially impacting both top-line growth and margins favorably.

Supreme Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Supreme's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.4% today to 7.6% in 3 years time.
• Analysts expect earnings to reach £17.9 million (and earnings per share of £0.15) by about February 2028, down from £23.8 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 17.7x on those 2028 earnings, up from 8.7x today. This future PE is greater than the current PE for the GB Retail Distributors industry at 8.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

Supreme Future Earnings Per Share Growth

Risks

• The upcoming vape tax and disposal ban could significantly impact 88Vape's revenue, as these regulatory changes may affect consumer demand and require additional investments in working capital and machinery for compliance.
  
• A reliance on M&A for growth, especially in categories like Soft Drinks, creates risks such as integration challenges, overpayment for acquisitions, or failure to realize expected synergies, potentially affecting future earnings.
  
• The potential increase in illicit trade due to higher taxes could undercut legal sales and shrink the customer base, negatively impacting revenues and market share.
  
• The decline in sales of 88Vape disposables and uncertainty about how consumers will respond to new products like pods and high puff devices could lead to reduced revenue from the Vaping category.
  
• Fluctuations in production costs, such as those for whey in the Wellness sector, and volatility in Lighting due to changes in LED pricing could squeeze margins and affect net profitability.

Valuation

• The analysts have a consensus price target of £2.25 for Supreme 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 £235.1 million, earnings will come to £17.9 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of £1.77, the analyst price target of £2.25 is 21.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.