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Massive revenue beat, decent EBITDA beat, strong cash beats today yet the 2 brokers only upgrading next year by 2-3%. This is stone cold wrong, the company must be slow-playing the brokers to keep forecasts easy to beat. Even on new consensus EPS of around 10.5p, Supreme trades on only 10x earnings but it's now back to strong growth and should be in the mid-teens it traded at before Whey then Lighting problems. This is a debt-free, high-return-on-capital, owner-managed, entrepreneurial, decent-margin, strongly-growing, M&A-wizard company. I think consensus is nearly 20% too low so I see the stock as nearly a double.
1. Supreme just did >£85m revenue in H2. I'm not aware of much seasonality, so double it to 'annualise' the recent run-rate. That's £170m. Brokers are at £159 and £162m. Nothing in either broker note to explain why the biz should be shrinking sequentially when they've just posted c. 30% revenue growth in Q3 and c. 15% revenue growth in Q4. NB also that lighting is at trough in FY23 (including in the half just reported), and is guided to recover in 2024. My model says revenue will be £172m in FY24 and even this has little sequential growth in vaping, which would be upside. So +10m at say 30% gross margin = +£3m to PBT (consensus c. £16.1m).
2. EBITDA didn't grow as well as revenue did in H2, and this seems to have been mainly a Q4 thing. We can't yet see whether it's a gross profit thing or a central cost thing. There are clearly temporary factors suppressing margin: a) still Whey as Supreme hedged, whey now fallen; b) double running costs as they move to new warehouse and potentially as they transfer acquisitions' activity to Manchester c) operational deleverage from the collapse in Lighting. And some permanent, e.g. mix shift to lower-margin Disposables within Vape category. While brokers do have margin recovery (EBITDA level) in FY2024, by around 1%age point, I don't think that's enough to 'normalise' the short-term factors out.
3. Brokers have raised D&A costs. But much of this jump is amortising intangibles from the Liberty Flights acquisition, and most companies rightly 'exceptionalise' this kind of amortisation. If the new warehouse means higher D&A costs even after they've consolidated into it (there are currently double costs), then that's fair enough.
4. Brokers still show 3.4m net debt for end March 2023 though company just said it was zero ish net debt. Paying down c. £12m debt (£4m from the French sale) this half is amazing, as there was huge revenue growth which should have needed working capital build. NB there's still a few £m to flow out of deferred consideration for their recent acquisitions. It shows how cash-generative Supreme is.
5. Brokers still have interest costs in 2024 and 2025, but the co is now no net debt and highly cash generative, and their debt's a revolver so freely payable down (i.e. it's not that they are paying high rates on term debt and getting low rates
Good note, the finances are compelling so something is weighing on sentiment. I'm guessing the vaping's marmite effect is holding the price back. Regardless, I'm staying in hoping at some point the financial's win the day and we get our rightful rewards.
It's an illiquid stock so could just be one seller.
I have another theory on why share price up so little: there were actually EPS downgrades even though this is based on literally a maths mistake plus poor guiding by the company. So if you aren't deep in the detail, Supreme is still showing negative (EPS) forecast momentum which is a turn-off for many investors.
The poor guiding is that
A) the brokers have been slow-played on EBITDA growth for Mar24 - see my arguments here and on another bulletin board. So EBITDA forecasts for 2024 only raised by a few hundred thousand when they should be up far more, millions, in my view.
B) brokers haven't cut interest cost forecasts despite big fall in debt, near- elimination of old amortisation of facility costs, and I believe the removal of the interest cost that they used to pay on a receivable financing facility now that all facilities merged into one. I think there's half a million quid upgrades to come from this by 2024 or latest 2025.
Plus:
C) brokers have been guided to raise Amortisation (and less so Depreciation) costs for Mar23 and Mar24, which is fair enough. But bizarrely both brokers are not adding back intangible amortisation to calculate Adjusted PBT even though Supreme has done this in 2021, 2022 and 1H23 reporting. This is in my view a literal mistake, not a matter of brokers thinking Supreme's exceptionalisation rules are not fair. Berenberg analyst is new so a forgivable mistake. This is a £1.2m error (0.8p or c. 8% of EPS) for 2023 on my estimates, 1.4m (0.9p of EPS, again about 8%) next year.
Listen to the 2 interviews from Sandy (Vox Markets yesterday, Directors Talk this morning) and he's dripping with confidence about 2024 and basically says "but in case something bad happens we don't want the market to get too excited'" Mgmt is sorry for the earnings downgrades from the Whey and Lighting surprises in the last year-and-a-bit so wants to make sure they don't disappoint us again. Fill your boots before the wider market wakes up.
https://www.voxmarkets.co.uk/articles/q-a-with-supreme-ceo-sandy-chadha-02d21e8/
Bull,
I've been worked through your points A, B and C on why you think SUP has "poor guiding":
A: When you say "see my arguments here and on another bulletin board" could you elaborate on what your arguments are?! If you've posted something to another bulletin board and don't want to retype it, I encourage you to investigate a useful function called copy and another called paste.
B: Interest Cost Forecasts: Looking at ED's brokers note they forecast zero for interest paid for FY23 H2 and for FY24. When you say "brokers haven't cut interest cost forecasts" - what cut to zero were you expecting? That doesn't make any sense?
C: Amortisation - I'm looking at Equity Development's forecast published 17th April and the £0.5m adjustment is there in their numbers. You mention 2 brokers who don't do this, but don't include who these are. The only 2 brokers who appear to be following (according to Research Tree) are ED as above and Hybridian who provide copy and paste the RNS analysis - i.e. no analysis. Again I can't see any factual basis that amortisation isn't being considered.
I do believe SUP has a bright future ahead but I am struggling to follow your logic, Bull.
Bull, I think I found your arguments further down. Considering your points 1-5:
1. Completely agree on doubling to look at run rate for FY2024. My calcs are £150m+ less £64.6m H1 = £85.4m+ H2 revenue. So run rate of £170.8m+
I've further analysed the H1 & H2 vaping which is disclosed in the update. £75m-£31.8m H1 = £43m H2 vaping revenue.
So this is a 35% increase H1->H2 following a 47% increase H2 FY2022 -> H1 FY2023.
Extrapolating forward given the news from continued UK gov't support, success in the marketplace with new flavours and combinations, as well as the agreement with La Vape (LVP) worth £2.5m+ I find it very hard to agree with ED's paltry 7.5% growth in FY2024. Very hard. But in the interests of prudence let's say the growth is "only" half of what we saw in H2 (i.e. half of 35%). £43mx2+17.5% £101m and GM of £38m to arrive at (Lighting £5.9m, Wellness £2.6m, Battery £4.3m, HH £0.9m) = £51.7m GM or a post Op-Ex adjusted EBITDA of £18.5m. So bull, our models are are broadly in agreement.(but see the Cherry below)
2. COGS & Op Ex - in my view FY2024 will be a tale of two halves. The move happens in a week. There'll be a few months of settling in. So FY2024 H1 will be impacted both in double costs and in settling in. FY2024 H2 we will see a marked improvement via synergies and capacity. ED predict +£6.5m for FY2024 and an improvement in adjusted EBITDA margin of 0.5% (10.1% to 10.6%). Given that SUP are laser-focused on cost control it would've been nice to see a forecast for FY2024 H1 and another for H2 because this extra cost feels "extraordinary" and as you say due to short-term factors. But see point 4 below.
3. D&A - disagree, you can't 'exceptionalise', you do have to following accountancy rules to amortise over the expected lifetime.
4. My interpretation is cash is neutral to debt as at 31/3/23. As at 30/09/22 it was cash £5.4m and "borrows" (as Suzanne puts it) at £18.3m so net = -£12.9m. So yes £12.9m of cash flow. But by debt they aren't including deferred & contingent consideration which is £5m. So a broker showing £3.4m suggests 1/3 of the deferred has also been paid (i.e. cash flow must actually be £14.3m for the 6 month period). Considering that operational cash flow was £4.8m in H1 FY2023 a more than doubling of cash flow suggests "AT LEAST" £150m of revenue for FY2023 might be a little conservative (and therefore a run rate of £170m would be too). Or more likely COGS is lower by around £9m and gross margins are higher than forecast. (Admin costs tend to be fixed). Interesting that COGS was £46.5m in H1 and ED think it will be £63.2 in H2 FY2023? They've multiplied H1's COGS by 35% (by av.revenue) but cash flow suggests that COGS is too high.
5. Interest costs 2024 and 2025 - covered this with your A,B,C,
Cherry on top? There's £3.8m other income for T-juice IP sale to LVP which will be recognised in FY2024. So adj. EBITDA FY2024 I estimate at £18.5m+£3.8m = £22.3m
Of course if I am right about the anomalous cash flow, and margins have shifted favourably to reduce FY2023 COGS from £109.7m to £100.7m, then this feeds straight through to adj. EBITDA. Given that ED on the 18th April predicted an out turn of £15.6m adj.EBITDA for FY2023, while the RNS 17th April suggests AT LEAST £19.3m, that suggest's ED's model of applying a 35% increase of costs appears simply wrong. It would be reasonable to think this margin improvement could feed into FY2024. If it did a pro rata £9m saving in FY2023 grows to around £10m in FY2024:
With the Cherry on top of £3.8m other income for T-juice IP sale to LVP we could be looking at adj. EBITDA FY2024 of £18.5m adj EBITDA+£10m even more adjusted+£3.8m cherry = £32.3m
Putting SUP of a forward PE of 3.7 and earnings per share of 27p. Even with the reduced dividend policy of 25% that's 6.7p or 6.5% yield at today's market price.
We'll know for sure in around 2 weeks when full year results are out.
GLA
Today's update shows even my more optimistic estimates were short of reality. The forward FY2024 estimates from SUP are about 10% higher (@£20.4m) than my previous estimates (except they've recognised the £4m sale of assets in FY2023). Tomorrow's presentation will be very interesting indeed.
Thanks for your posts. Very useful.