Supreme (SUP)

This is a recent new listing. The CEO is apparently a charismatic and successful entrepreneur, and the business is capital light and fast growing.

A trading update the other day reported significant sales growth, Ebitda ahead of expectations and modest net debt:

For the year ended 31 March 2021, Supreme expects to report a c. 30% increase in revenues to at least £121 million (2020: £92.3 million), in-line with management’s expectations, and anticipates delivering Adjusted EBITDA slightly ahead of expectations of at least £19 million (2020: £16.2 million), an increase of c. 20%. Movements in Group margin reflect the changes in revenue mix following the acquisition of Provider Distribution in February 2020 which are partially offset by stronger growth in higher margin products in Vaping and Sports Nutrition & Wellness.

The Group remains highly cash generative, with net debt at 31 March 2021 of approximately £5.1 million (31 March 2020: £18.7 million).

Paul Scott’s verdict on Stockopedia was positive, although he did quibble with the use of Ebitda:

Supreme concentrates on distribution of fast-moving consumer staples, with a high profit per square foot at retailers - e.g. batteries, vaping products, vitamins, etc. So far so good, that’s a business model which appeals to me - repeat revenues, small & expensive items. Although I’m less keen on vaping products, given the as yet unknown long-term health risks.

My opinion - at my first glance, I like the look of this.

Comments to Paul’s Stockopedia post made favourable noises about the CEO:

I have a very small holding, huge part of the story for me is its charismatic CEO Sandy Chadha, who has built it from the ground up. They also seem to empower their sales team, which seems to get the most out of them. Great margins (for a buy and sell business) and a holding by Slater Investments.

I really like the fact that Supreme (LON:SUP) have migrated into Vape, Sports Nutrition and now Vitamins, all with excellent margins. Just searched the Supreme (LON:SUP) CEO and found an interesting article about him here…
https://static.theceomagazine.com/content/downloads/pdf/EU-2016.04-I_Sandy_Chadha_-_Supreme_Imports.pdf

Lastly a friend of mine who knows a few savvy investors has also heard positive things and decided to invest. The down side here is the lack of any long term track record, on the other hand that could present an opportunity to get in early before it takes off, maybe…

Has anybody else heard good things about SUP or taken a closer look at it? I’m not normally that keen on businesses that don’t have some strong support of brand/moat but this one does seem to generate operating margins in the mid teens, have no real debt, fast growth, good fcf generation and an energetic founder with a very delegated/trust based management approach. Thoughts?

Hi Steve,

I have had a quick look at the admission prospectus.

SUP now makes most of its money from vaping:

Prospectus contains 7 pages outlining e-cigarette regulations:

Also another page of general e-cigarette investment risks:

Probably worth perusing those regulations and risks first if this stock is of interest.

Vaping sales are dominated by three large customers. Not ideal:

Vaping customers are listed as “Asda, B&M, Home Bargains, Iceland, Poundland and Bestway, Londis, Costcutter, QD Stores, The Range and Original Factory Shop”. So a range of ‘value’ retailers that tend not to give suppliers too much margin over time.

I am pretty sure the group financials are flattered by some attractive economics through the manufacturing/selling of vaping products. Whether those economics are sustainable is something to consider.

SUP has launched an intriguing employee bonus scheme:

Reach a £1billion market cap within 5 years and everyone get a year’s salary as a bonus. Market cap at the 134p float was £156million.

I note that Mr Chadha and related parties raised £60m at the float, but Mr Chadha awarded himself options representing 5% of the share count with targets lower than the 5-year general bonus scheme:

I detest smoking and vaping, so not a stock I would ever consider!

Maynard

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Just a couple of other points to chip in.

FirstlyMr Chadha stated his future intentions were for the company to pay out half net profits by way of dividends.

Based on the latest net profit and latest share count, this would have amounted to 47p per share representing a yield of over 25% on current share price. Some chance!

Secondly the IPO raised £7m for the company which was to be used to reduce borowings. This would reduce the net debt to £10.9m against net shareholder funds of £4.1m and thus still highly geared.

Given Maynard’s comments it seems clear that the main beneficiary in the IPO was clearly Mr Chadha.

Pressure on margins is likely to be a big issue over time so not one for me either.

Snazzy

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Thanks both for the comments. The £1bn market cap bonus target is not ideal since that could motivate M&A as the route to achieving it rather than getting the share price to say 5-6x the IPO level. Snazzytime, the current mkt cap of SUP is £216m, estimated net income for yr ending mar-22 is £16m so a 50% payout implies dividends paid out of 8m/216m = DY of 3.7%. This seems perfectly reasonable to me. Playing out 2.5% of the company for every 100% increase in value seems ok to me. The other target is aimed more at employees since it is 1x salary. I suspect SUP may do well simply due to the entrepreneurial style so it’ll be interesting to watch, though I respect the ethical concerns over vaping.

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Apologies Steve - schoolboy error with my calculator!

Snazzy

I have known the business for a while.

The “bull” case would be: the CEO has a proven track record; the £60m cash out was CGT driven and CEO and family still have 60%+; Supreme has dominant positions in high margin/volume retail products through a number of channels; the margins, return on capital and cash generation are strong; it has entered new international markets; the non execs are relevant and credible (i.e. not late 60s “biscuit eaters); I like the CFO profile; the shareholder base includes Slater, Miton, Jupiter, Blackrock etc… and the EV at 10x Mar 21 profits is not high by current standards.

The “bear” would be: it could be an opportunistic trading business; vapes are immoral, likely to be more regulated and/or are a temporary fad; £60m cash out is life changing; previous institutional backers of this business lost all their capital albeit c. 15 years ago; the 15% profit margins are not sustainable for a business like this (it would be interesting to see them split by product); costs may be artificially low and thus margins etc… inflated, and the group is too reliant on a few senior managers.

I personally would not invest: the group seems a bit opportunistic and incoherent (I prefer a clear and scaleable model); it also seems very reliant on one or possibly two managers; like Maynard, I dislike vapes etc…; the new issue market is incredibly frothy at the moment (even the brokers concede that many businesses currently float at values a long way above what they would trade at privately); and, above all, I don’t understand it, nor do I think I could understand it well enough. Despite that, I suspect your contact is right that the CEO is a “money maker” surrounded by some well known NW figures that should give some comfort re obvious family risks (but they don’t own many shares!).

Ultimately, it is down to individual investment style and I have given up on “hunches”.

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Really useful opinion MTIOC, thank you!

Excellent summary MTIOC.

I did read that there had been a negative back story but was unable to find any details. Would be interesting to know to what extent Mr Chadha was involved in that failure and whether he has other similar history?

A previous similar business failure always rings loud alarm bells and even in isolation would usually be enough for me to leave well alone.

Snazzytime

See:

And, third para from the bottom of Admission document on p 15.

image

As I said, a long time ago, very different business and there may have been other circumstances.

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