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It is extremely concerning to read that Equity Development have published effectively what is a £15m drop in guidance to the forecast turnover they published only 5 weeks ago. I base this from their new report which says the combined revenue of Supreme and Cuts Ice will have no impact on revenue and earnings. I appreciate they say they will "revisit" this at the next update...... is that really good enough?
Cuts Ice generated £10m of revenue in y/e 28/2/21 (latest accounts) but £15m 28/2/20. Given Cuts Ice report significant disruption due to Covid in y/e 2021 (UK and Germany closed vape shops as were deemed non-essential) there was negligible profit however again using the 2020 numbers the PAT was £1.5m. Given the reopening it *SHOULD* be earnings enhancing.
We don't know the purchase price (for now). However £18.6m is my guess (6.66x 2020 earnings plus the net assets of some £8.6m).
Some other factoids about CutsIce:
> Based in Park Royal NW London. Building appears to be a lease expiring in the next 2-5 years.
> Gross Margin 46% (vs SUP 44.7% GM on vaping!)
> Channel Mix: 93% wholesale and 7% retail (presumably online sales?)
> Geographic Mix: UK 48%, EU 48%, ROW 4%
> Germany, France, Spain, Holland are mentioned for countries sales
> Historic stock impairments up to £0.9m (yikes)
> Historic Bad Debt up to £0.2m
> 3rd Party Logistics partner in Netherlands to ensure rapid delivery to EU (avoid red tape)
> Aggressive depreciation policy suggests no hidden losses hidden in FAs
> Headcount of approx 90 people
Conclusion: My take on the limited information is that this will be both revenue accretive and earnings accretive. There are great synergies from a vaping point of view - however the "traditional" model of cross sell and "it's not fair" might be somewhat limited. What I mean by that is that the customer type of Cuts Ices might be more distributors who sell to retailers rather than direct relationships with retailers (as SUP has in the UK and more recently in Ireland). So perhaps the opportunity to cross sell lighting, batteries and so on might be limited?? I might be wrong on this and it is a question to be posed to SUP. There is clearly an 88 Vape and Liberty synergy however.
Plus cost reductions will feature and UK distribution costs particularly can be streamlined.
If the 2020 profit rate can be restored, plus synergies/cost savings of some £1.5m (of £5m per annum), plus synergies for 88Vape then this could mean a £3.5m-£4.5m uplift to earnings.
So on an assumed 6.66x valuation that drops the simple payback could be a highly attractive 2-3 years. Liberty was done on a 7x valuation so I might be slightly below the buy price.
So I'm happy with this announcement and it should be positive for SUP shareholders too. There appears to be no dilution and it is being funded through debt facilities (SUP has a £25m debt facility - so if I am wrong on the purchase price it has to be below £25m and less as that
That Equity Development note is confusing.
They say "The acquisitions are... expected to be immediately EBITDA (adj.) earnings enhancing", but then also say "At this stage we leave our existing outlook in place with the proviso to revise at the next earnings update" without giving a reason why.
To me, the fact that the acquisition is being financed out of existing resources with no commensurate cut in the divi, is encouraging.
Then, they also say "The acquisitions are... expected to be immediately EBITDA (adj.) earnings enhancing".
Ignore last sentence.
Also, that the acquisitions "bring e-liquid technical and regulatory compliance knowhow" is a very good thing in my view.
Hi unhooked, I wrote my piece before reading equity’s new article so I agree with you on the new know how and other points you made. Have they bought 2 businesses? There’s a flavour business too isn’t there? Need to read it properly later
Always worth hearing your thoughts.
Additional factoids reading Equity D's 9th August article:
> Italy and Belgium are mentioned which weren't in the 2021 accounts.
> Equity D think European sales were majority of sales. Unless the mix has completely changed since Feb 2021 (last accounts) then this is incorrect i.e. majority were UK and not EU sales.
> The importance of having an ISO Class-7 cleanroom matches GMP (good manufacturing practice) industry standards, to meet vaping-related Tobacco Products Directive (TPD) and "other regulatory standards" (Agricore > Can't think what other standards these would be?).
> It begs the question of how SUP have managed without a cleanroom until now? It feels like this could unlock new markets and opportunities maybe? Particularly EU sales? TPD is an EU directive from 2014 which was incorporated into UK law: https://www.legislation.gov.uk/eudr/2014/40/contents
This gives a general overview and is relevant to SUP growing focus on vaping (e-cigarettes) but didn't contain anything that I could find to set out clean room standards or anything like that.
https://researchbriefings.files.parliament.uk/documents/CBP-8114/CBP-8114.pdf
That's about it. I'll cover Flavour Core separately.
hi the real trump card of sup is the new nutrition&wellness business imho. And speaking of cross-selling that business could be linked to vaping, it may seem strange but the two businesses are very close each other..that's what I wish it was at least..