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Supreme is a super-charged growth and income play
Investors seeking an entrepreneurial smaller company with big growth ambitions should buy shares in Supreme (SUP:AIM), the fast-moving consumer products supplier which joined AIM in February. The stock offers a 3.6% prospective dividend yield and is trading on an undemanding 14 times forecast earnings for the year to March 2022.
Steered by founder and chief executive Sandy Chadha, Supreme has a strong track record of introducing new brands and categories to a retail customer base.
It should be able to scale in the years ahead, with its focus on high growth categories such as vaping and sports nutrition set to drive earnings.
Supreme owns, licenses and distributes a variety of consumer brands across the vaping, sports nutrition, lighting, batteries and household segments.
It distributes globally recognised brands such as Duracell, Energizer and Panasonic and also boasts the in-house developed 88Vape brand, which has become the UK’s vaping e-liquids leader.
Supreme originally wanted to float in May 2018, yet its stock market listing was postponed, with management blaming market conditions. Though disappointing at the time, the delay was no bad thing as it enabled Supreme to build on its track record and eventually arrive on AIM via an oversubscribed offering, priced at 134p earlier this year.
Georgina Brittain, manager of investment trust JPMorgan Smaller Companies (JMI), looked at the business in 2018 and declined to invest at the time as she didn’t think the business was mature enough, but she subsequently invested the second time around.
‘We thought it had some interesting areas (in 2018),’ remarked Brittain recently, ‘but it (Supreme) didn’t feel sturdy enough so we couldn’t trust the numbers. When it announced plans to float again, we could look at the forecasts that had been in the market, how they had done, where they had done better or worse, and what was changing.’
Another backer of the company when it came to market earlier this year was Melwin Mehta, manager of the MI Sterling Select Companies Fund (0270892). He said: ‘With ample opportunities to both grow sales from its existing product portfolio and expand into new product categories, in our view, this company has a long runway ahead of it.’
CHARGED FOR GROWTH
Although bears might argue Supreme sells commoditised products, bulls would counter that the company has design and manufacturing skills, an extensive retail distribution network and direct to consumer capabilities that provide a good route to market for brands and products.
Supreme has amassed a retail customer base ranging from local convenience stores to major discounters and grocers such as B&M, Poundland, Asda, Iceland and Sports Direct.
Investment bank Berenberg says the group generates strong returns on invested capital, 59% in the year to March 2020, due to the asset-light nature of its distribution business and the efficiency with which Supreme has set up its own manufacturing capabilities in vaping and sports nutrition.
Cash-generative Supreme came to the stock market with a 50% dividend payout ratio and Berenberg believes special dividends could feature going forwards too.
It is forecast to pay 6.67p per share in dividends for the current financial year, rising to 7.52p in the following year.
In a trading update on 4 May, Supreme said that thanks to a strong performance across key growth categories including vaping, sports nutrition and wellness, adjusted earnings before interest, tax, depreciation and amortisation for the year to March 2021 would beat expectations, achieving at least £19 million (2020: £16.2 million), and sales would hit at least £121 million (2020: £92.3 million).
Supreme has seen notable demand across sports nutrition and wellness and tasty sales of meal replacement powders, protein snack bars, as well as early success with private label vitamins.
A brand with a strong competitive moat due to regulation, its competitive pricing and the fact that vapers rarely switch brands, 88Vape is also seeing strong customer traction and is now being sold in around 1,200 McColl’s convenience stores.
Berenberg thinks there is more consolidation to come in the fragmented vaping market, and with Supreme’s 88Vape brand the leading one by volume share, ‘it looks well placed to continue growing nicely in the years ahead,’ adds the bank.
It says Supreme’s strong balance sheet leaves ‘plenty of optionality’ for earnings enhancing bolt-on acquisitions and additional cash returns to shareholders.
Berenberg forecasts earnings per share growth from 11.5p in the year to March 2021 to 13.3p in 2022, rising to 15.1p in 2023.