9th Aug 2022 12:23
(Alliance News) - Berenberg reiterated its 'buy' rating for vaping firm Supreme PLC after its acquisition of Cuts Ice Ltd and e-liquid developer and regulatory compliance business Flavour Core Ltd.
Despite re-upping its confidence in the 'buy' recommendation, Berenberg said you will have to wait a while to see if the asset acquisitions will pay dividends.
"We leave our numbers unchanged for the time being, in recognition of the inevitable uncertainties when acquiring a business out of administration. We expect more visibility on the potential contribution following the interims in November, by which time the assets should be fully integrated," the German investment bank said.
Berenberg has a 170 pence price target for Supreme. Shares in Supreme were 3.0% higher in London on Tuesday around midday at 104.50p each, but are down 56% so far in 2022.
On Tuesday, Supreme agreed to buy the trade and assets of vaping manufacturer Cuts Ice and e-liquid developer and regulatory compliance business Flavour Core for an undisclosed sum.
The firm said the two deals are "firmly" in line with its strategy.
Despite not disclosing the value of the deal, Supreme said it will be satisfied from existing resources and expects it to be immediately earnings enhancing.
Berenberg believes the deal will cost abut GBP2.5 million, which could include about GBP1.5 million in shares.
"Looking at Companies House data, Cuts Ice generated revenue of GBP11 million in the year to February 2021, although we expect the run-rate on this will have been much lower in the last 12 months, given the business's ultimate failure under prior ownership. Its gross margin was 46%, roughly in line with Supreme's own vaping business, although it made negligible Ebitda, and we expect this to have worsened in the period since."
Cuts Ice has developed a vape brand called 'T Juice' and a growing European sales footprint, while Flavour Core produces vape-grade flavour concentrates. Both firms are expected to be "fully integrated into Supreme's wider Vaping division", the company notes.
Berenberg expects Supreme to consolidate all of Cuts Ice's manufacturing into its own facilities in Manchester, which should deliver "meaningful synergies".
It added: "We also expect there should be synergies from bringing the Flavour Core business under the Supreme umbrella, given Supreme currently buys its flavourings from third parties."
Around 70% of T-Juice brand sales are into Europe, principally France and Germany.
"Historically, pushing its product range into Europe has not been a priority for Supreme. However, we think the T-Juice distribution network could offer opportunities for Supreme to sell more of its products into the continent over the coming years," Berenberg added.
Supreme CEO Sandy Chadha said the firm sees "significant growth" from its vaping activities, and believes these deals are an "excellent example of how we can continue to add both scale and expertise into the group."
Berenberg added: "Supreme's brand 88vape is the market leader in vaping e-liquids in the UK. We think its competitive moat is strong, due to regulation, 88vape's leading price point and the fact that vapers seldom switch brands. We therefore believe it is well positioned to keep growing as more smokers switch to vaping."
By Paul McGowan; [email protected]
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