Investors looking to play the growth in demand for e-cigarettes may be interested in the forthcoming stock market listing of Supreme on AIM. The business, expected to be valued between £110m and £130m, hopes to float in early May.

Supreme has three business lines serving low-cost retailers, supermarkets and wholesalers.

It claims to be one of the largest producers of vaping e-liquids in the UK by volume, having manufactured an average of over 130,000 bottles per working day at its facility in Manchester in March 2018.

On the distribution side, it sold approximately 690,000 hardware kits (the hardware is imported from China) and circa 4m items of vaping hardware in 2017.

It supplied approximately 200m batteries in its financial year to 31 March 2017 including products under the Energizer, Philips and Eveready brands via licensing agreements.

It subcontracts production of lighting products like LED lamps to third parties in China and in its 2017 financial year distributed approximately 35m lighting products.

Chief executive Sandy Chadha tells Shares that Supreme will pay 50% of post-tax profit in dividends and the shares will yield circa 3% based on the expected IPO (initial public offering) price.

‘The company has limited capital expenditure requirements apart from a planned investment in a factory,’ he reveals.

Supreme is a family-run business and Chadha is the second generation in charge.

It hopes to raise £10m at the IPO. From that money, £4m will clear its debt and the rest will fund growth plans including the aforementioned factory investment and to provide a war chest to make acquisitions in the £1m to £5m range for vaping. ‘We want to buy companies with known brands and take over their manufacturing,’ says Chadha.

Earnings growth is expected to be driven by the vaping side of operations in the UK and international gains for batteries and lighting. It also has aspirations to enter into new markets such as sports nutrition.

The business enjoyed 29% compound annual growth in sales between 2015 and 2017, the latter period making £70.7m. In the same year pre-tax profit grew by 15% to £6.9m.

Chadha says he will still own more than 50% of the business post-listing and wants to grow Supreme ‘to a high valuation’ over the next three to five years.

SHARES SAYS:

On one hand the business is making a decent amount of profit compared to sales and vaping is a growth market.

However, we note that liquids, lighting and batteries are all commoditised markets so we have some reservations about the investment case ahead of listing.

There is also the risk of tighter legislation regarding the sale of e-cigarettes which could have a negative impact on Supreme’s sales.

We suggest you watch from the sidelines when it floats and read the admission document thoroughly to understand the business before considering an investment. (DC)

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