GCISupreme's robust cash generation and profit growth defy market challenges
The beauty of investing in rapidly expanding fast moving consumer goods stocks like is their double digit organic growth, expanding profit margins & robust cash generation. Indeed despite the last year’s cost-of-living crisis, cash strapped UK consumers have continued to flock to Supreme’s affordable, ambient and non-perishable mass market products.
So much so that at today’s sparkling March FY’24 results, turnover (+42% to £221.2m), gross margins (3% higher at 29%), adjusted EBITDA (+96%, £38.1m), PBT (+102%, £30.7m) and EPS (+77%, 20.9p) all jumped handsomely on the back of standout performances from Branded distribution (£63.5m revs vs £7.8m LY; re Elfbar & Lost Mary), Vaping(+9%, £82.8m), Sports & nutrition (+7%, £18m) & Lighting (+7%, £16.5m), of which the vast majority impressively came from volume and share gains.
Elsewhere, cashflow was strong too (OCF +40%, £27.1m) with net funds (pre IFRS 16) closing Mar’24 at £11.6m(vs £3.2m LY). Thus enabling the group to not only hike the dividend 57% to 4.7p, but also pay for last week’s £15m earnings accretive acquisition of @Clearly_Drinks without any need for debt finance.
Looking ahead Supreme has made a “positive start in Q1’25”, and is “trading comfortably in line with current market expectations” (re Adj EBITDA of £36.9m on turnover of £242m). Here the Vaping and Branded Distribution divisions are anticipated to be largely unaffected in FY25 by the Government’s proposed ban of disposable vapes.
Equity Development have a 225p/share fair value, based on FY’25 sales, EBITDA and adjusted EPS of £239.7m, £37.0m and 19.5p respectively. Thus putting the stock (at 179p) on modest multiples of 5.5x EV/EBITDA and 9.1x PER, alongside paying an Est 4.9p dividend and a 15%+ free cashflow yield.
CEO Sandy Chadha states "Supreme has delivered an outstanding performance, with strong revenue growth across all 5 divisions. Set against a challenging backdrop, we continue to provide high-quality, high-value products to our customers."
"With regards to vaping, we are fully committed to doing what we can to support the eradication of underage vaping so that the industry can get back to its core objective: helping adult smokers find an affordable, sustainable, and safer alternative to smoking. Operationally and financially, we are in an excellent position to expand organically and by acquisition. We’ve made a very positive start to FY’25, and I look forward to updating all our stakeholders later this year on our continued progress."
There are lots of other opportunities as well. Not least, I suspect, further economies of scale, cross-selling, expanding retail distribution, new product development, online growth, and continued tight cost control.
Sure, it will take a little time to further build Supreme’s own stable of in-house brands. Yet, equally, I wouldn’t bet against the Board achieving its long-term aims, alongside justifying a much, much higher valuation.
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