Supreme PLC-SUP.L
UK Microcap Play
Disclaimer: This newsletter is not financial advice this is for educational purposes only so please DON’T take this newsletter as a buy or sell signal.
Supreme PLC Fundamentals:
Below is a checklist I normally use in my process when looking at the fundamentals of a company. If the company meets my criteria it will be colour-coded in green and if the company fails to meet my criteria it will be colour-coded in red which means I need to investigate further and ask myself why this is the case.
As you can see below there are 3 red boxes and I am going to explain each one.
5-Year Average PE Ratio & 5-Year Price To Free Cash Flow Ratio-Supreme currently has a 5-Year Average PE Ratio of 16x and a 5-Year Average Price To Free Cash Flow Ratio of 16x which might be an indicator that this company is currently trading at a premium to the market since the average stock market PE Ratio is 15x. One thing to remember is if a company can grow 16% from now until judgment day and it can sustain that growth then the current valuation will look cheap. This goes for the opposite side of the spectrum where if a company was trading at 15x 5-year earnings and they are only growing 3% a year that might seem expensive because the company can’t justify its valuation.
Shares Outstanding-When looking at a company I ideally want the company to decrease their shares outstanding or keep them the same. As you can see Supreme shares outstanding have gone up in the last 5 years. As of right now that level of dilution isn’t a cause for concern as the share issuing looks to have flattened if you look at the last 2 years.
Business Overview:
Founded by GS Chadha, Supreme PLC supplies and distributes a range of consumer goods in the United Kingdom and internationally. Supreme offers consumer batteries, lighting, energy-saving bulbs, private label lighting, LED light fittings, lamps and light fittings, point-of-sale display solutions, sports nutrition/wellness products, and smart home LED technology solutions. Supreme also manufactures vaping products under the 88Vape brand and sports nutrition and wellness products. Supreme also supplies its products to retailers, wholesalers, and hardware stores. Examples of companies that Supreme supplies to are Pure Gym, Sainsbury’s, Poundland, Amazon and even Tesco.
For us to get a better understanding of Supreme we need to go back to 1975. Supreme was founded in 1975 by GS Chadha(father of Sandy Chadha-Current CEO). GS Chadha first started off selling toys and watches from his mobile van at seaside resorts. During this time GS Chadha manages to achieve annual sales of £250,000.
After having success with selling toys and watches, GS Chadha entered the battery market in 1981 after stumbling upon samples at a trade show. Operating from a 3000sq/ft warehouse, Supreme signed distribution agreements with Panasonic and achieve annual sales of £2.2 million. In 1998 Supreme secures official UK distribution agreements with Duracell, Eveready, Energizer and Kodak. By the turn of the century, Supreme also signed a distribution agreement with Samsung batteries and is delivering profits of over £1 million per year. By 2001 Supreme is now the UK’s biggest battery distributor, selling 100 million batteries to 2,100 live customers. Supreme continues to expand with a move into a new 45,000sq/ft distribution centre in Trafford Park where sales increased to £28 million per year.
Following decades of hard work, GS Chadha retires and Supreme is purchased by his son Sandy Chadha, who has spent a decade as the company’s managing director. With the company’s future now secured, Sandy looks for even greater opportunities to grow the business by extending The Trafford Park site to 88,000sq/ft, investing in IT infrastructure where Supreme now operates a fully paperless warehouse and office, along with a fully online ordering system.
To diversify its revenue stream Supreme started to manufacture E-liquids and other wellness products such as protein powder, vitamins and supplements in their VN labs facilities in Trafford Park, Manchester. In 2015 Supreme enters the vaping and electronic cigarette marketplace with the launch of 88vape where they were able to take the vaping market by storm with two core principles; unrivalled pricing and high quality throughout. Supreme also launched its revolutionary £1 E-Liquid under the 88vape brand to further cement its place in the market. Electronic Cigarettes are now one of the largest global markets and since being introduced to the UK, the vaping market has grown by 23.4% from 2017 to 2021. The VN Labs manufacturing facility that produces vapes makes 250,000+ bottles of E-Liquid a day. This makes VN Labs the largest manufacturer of E-Liquid in the UK, with their E-Liquids being stocked in over 10,000 retail outlets across the country.
In 2018, Supreme acquired the assets of Shannon Protein Technologies for £100,000 to begin a new and exciting venture in Sports Nutrition. Later in the year, Supreme acquired the assets of Protein Dynamix, one of the UK’s leading manufacturers in Sports Nutrition. Supreme now stocks the entire range of accessories, snacks, protein powders and supplements for Pure Gym which is Britain’s largest gym chain with over 1 million members.
Business Segments:
Supreme has many different business segments and I am going to talk about each one below:
Batteries-Since the early 90s, Supreme has partnered with some of the world’s biggest names in batteries such as Duracell, Energizer and Panasonic, providing their customers across the globe with an ever-expanding, value-for-money product range. Supreme also have an exclusive licensing agreement for JCB batteries, which is fast becoming a top brand in the discount sector offering all types of batteries such as dry cell, rechargeable and coin cell. Servicing over 20% of the UK market, Supreme now supplies over 50,000 retail, wholesale, and independent and online outlets with more than 300 million batteries per year.
Vaping-In 2013, Supreme first ventured into the vaping market with the premium brand Kik. Shortly after the initial success, Supreme decided to fill a gap in the market for a high-quality £1 E-Liquid, and that’s when 88vape was born. Since its creation in 2015, the core principles of 88vape have always been unrivalled pricing while still using the best possible ingredients available. Supreme can achieve this with the use of its state-of-the-art on-site manufacturing facility in Manchester which can produce a staggering 250,000 bottles of liquid every day. Soon after the launch of 88vape, the range was introduced into many popular high-street discount retail stores. This brought something new to the UK, displaying vaping products on the shelves rather than behind the security barrier behind cashiers. 88vape is now the most recognised vaping brand in the UK. Over 5.2 million bottles of 10ml E-Liquid are manufactured on-site at VN Labs every month, with the capacity to increase production even more as the vaping market continues to grow. The majority of Supreme production focuses on their best-selling £1 88vape E-Liquid which can run private label projects too.
Lighting Brands-Thanks to exclusive licence agreements with big-name brands, Supreme are the proud manufacturer and distributor of Eveready, Energizer and JCB lamps, and the PowerMaster brand of light fittings. More recently, in 2019, Supreme welcomed LED Hut to the Supreme Group which further expands its lighting portfolio with the introduction of the LumiLife brand, which Supreme continues to supply on the LED Hut website and to its existing customer base. Supreme award-winning factories work with the company to produce lamps in many shapes and sizes to meet consumers’ demands across all brands. With an extensive range and an incomparable service level, it’s easy to see why thousands of retail outlets, electricians, wholesalers and independent retailers around the world rely on Supreme to keep their customers’ lights on. Thanks to Supreme’s exclusive lighting distribution agreements with Energizer, Eveready and JCB, Supreme is directly responsible for a significant portion of the UK lighting market.
Sports Nutrition-One of the newest additions to the impressive Supreme product portfolio is Sports Nutrition and Vitamins, bringing you products from Go Nutrition, Protein Dynamix, Battle Snacks and Millions & Millions. All Supreme nutrition brands can be found online and in many high-street discount stores, as well as smaller retailers across the country. Each brand has been created by a team of experts to have its unique place on the market, meaning there is something on offer to suit the company’s diverse customer base. Recently Supreme has expanded its on-site manufacturing facility which means Supreme is allowed to bring most of the sports nutrition production in-house. By doing this Supreme will now have complete control over all its brands, know exactly which ingredients are in each product and can put its products through rigorous testing before consumption while offering the best value for money possible.
Household Essentials-Supreme also offers a comprehensive selection of household essentials, perfect for retailers, wholesalers and hardware stores. Supreme’s product line for household essentials consists of everything from hand sanitiser to extension leads. Supreme’s most recent additions to their essentials range include confectionery from Dairy Milk & Terry’s, as well as big-name toiletry brands, Right Guard, Lynx & Aussie.
Management
When looking at management I like to judge the CEO in several different ways such as experience, capital allocation skills and Incentives. In this section, I will cover if management incentive is aligned with shareholders.
Experience-Sandeep Chadha also known as Sandy Chadha is the Chief Executive Officer and Director at Supreme PLC. Sandy has been in this role for about 31 years.
Below is an image illustrating the current experience of the Supreme PLC board members:
Capital Allocation-When it comes to judging management I think capital allocation is very important because I want management to create shareholder value and not destroy it. So far Supreme’s capital allocation has been spot on because they are giving value back to shareholders via dividends and making strategic acquisitions that will benefit the business in the long run.
Supreme PLC is currently paying a dividend with a yield of 4.58%. As shown below this dividend is sustainable because this current dividend only takes up 45% of their overall free cash flow. Supreme did cut their dividend earlier on in 2022. Management believes they can generate a high return on their investment which is good capital allocation skills because management cares more about the long-term of the company and this also aligns with my belief that dividends should be the last resort for management if they can’t generate a high return on their investments.
Incentive-This is important because if the current board is actively purchasing stock of their own business this is a positive indicator that shows that management believes the stock is undervalued and they believe in the long-term prospect of the company.
As you can see below Paul McDonald(chairman of the board) is currently the only insider that is buying Supreme PLC shares.
Bull And Bear Case:
In this section, I am going to highlight the bull and bear case for this investment.
Bull Case
Bull Case-The first bull case for this investment is the potential growth Supreme can have in the vaping market as the UK is looking to cut out smoking by 2030. As an alternative to smoking cigarettes vaping has been recommended and in the Uk, around 13.3% of the population smoke cigarettes which is about 6.6 million people. If we can get a fraction of those people to give up cigarettes and switch to an alternative like vaping this will translate well onto Supreme’s top and bottom line since they are the leader in this market(30% market share).
Bear Case
Bear Case-The first bear case to pay attention to is regulatory risk. Vaping makes up a large portion of Supreme’s revenue. Vaping is a fairly recent innovation compared to traditional cigarettes, with E-cigarette products being introduced to the European market initially in 2007. There are no long-term health studies on the effect of vaping on users. Whilst recent reports and public bodies widely support vaping as being substantially less (95%) harmful than smoking and a proven aid to cease smoking, future reports may take a different view based on longer-term studies which may affect the company revenues and profits. Regulation of the vaping market in the UK may change in the future which could threaten the future of the industry. Supreme is a member of the UK vaping association and management remains alive to any upcoming changes or considered changes to regulation going on in the UK and across the world. Management has acknowledged that there would need to be at least 2 years’ notice given for any material changes to the legislation which would give the company enough time to adapt accordingly.
Bear Case-The second bear case to pay attention to is the licencing of their products. Supreme has several licensing agreements in place which allow the manufacture, production and distribution of products using an external brand, notably JCB and Energizer. Supreme may not be able to renew its existing license agreements and may not be able to negotiate new agreements in the future. Supreme inability to obtain renewed licensing agreements or comparable terms could hurt the business, financial condition and future operations.
Valuation:
In this section, I am going to talk about valuation. I will be valuing Supreme using a discounted cash flow model to come up with a price I am willing to pay based on a conservative growth rate and my desired return of 15%. Since Supreme hasn’t got a like-for-like competitor that is publicly traded, there won’t be any industry comparison based on valuation.
In this final part, I will be valuing Supreme by using a discounted cash flow model to come up with a price that I am willing to pay for the company. When valuing a company I tend to be conservative so below is the valuation of Supreme based on a 6-year projection.
As you can see based on a conservative assumption where Supreme is looking to grow around 7% I went conservative and assumed a 5% growth in the first 1-3 years then the growth will slow down to 2% 4-6 years out. In my assumption, I also went with an exit multiple of 12x earnings which is below the historical highs that Supreme has traded at in the past. Based on my assumption I have come to a buy price of £0.84p which means right now Supreme is trading significantly above what I am willing to pay.
Thanks for reading my newsletter on Supreme. Disclaimer this newsletter is not financial advice this is for educational purposes only so please DON’T take this as a buy or sell signal.
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Nice research, good breakdown and certainly an interesting company.
Have you considered doing a sum of the parts analysis for these guys? I think seeing the value of each individual business segment would be really interesting (if they report each segment separately). Maybe a potential catalyst could be selling off one of these business segments if the conglomerate discount is too high.