Supreme (LSE: SUP) is a new UK share on the London stock market with an underlying business that specialises in vaping products. Meanwhile, smoking products companies such as British American Tobacco and Imperial Brands have been racing to develop revenues from new-generation products too.
I think the wider fast-moving consumer goods (FMCG) sector has attractive economics. And the smoking products industry is a big part of that. But those old tobacco companies are out of favour with investors. And their operations attract a lot of regulatory scrutiny. Perhaps a better way to invest in the fast-growing vaping sub-sector is via a company like Supreme. At least the distributor comes without much of the negative baggage carried by the old tobacco stalwarts.
Why I think Supreme is a UK share to buy now
Supreme arrived on the FTSE AIM market on 1 February. The initial share price was 134p. But now it’s near 199p. And I think the progress reflects the emerging growth prospects of the business.
Today’s full-year results report shows that in the trading year to 31 March, around 51% of gross profit came from vaping. And that category produced revenue growth of 36% compared to the prior year.
The firm reckons vaping is one of its two highest-margin categories. The second is Sports Nutrition & Wellness, which accounted for almost 9% of overall gross profit in the period. And revenue from the category grew by an impressive 38%.
But as well as distributing products to wholesalers and retailers, Supreme has a growing manufacturing operation within its business. And much of the progress in the vaping category was driven by its own 88vape brand. I think that’s exciting and underlines the potential for it to develop as a diversified FMCG company in the years ahead. Meanwhile, in addition to the categories already mentioned, the firm also distributes lighting, batteries and branded consumer products.
And today’s overall figures were good. Revenue grew by 33%. And adjusted earnings per share moved 17% higher. There was also a 24% increase in gross profit. And the directors said economies of scale and efficiency improvements drove that progress as manufacturing output ramped up.
Growth anticipated ahead
Looking ahead, chief executive Sandy Chadha thinks there are “clear and very exciting” opportunities to grow the business. And he said that’s particularly true in the categories of Sports Nutrition & Wellness and Vaping that are performing well.
Meanwhile, City analysts have pencilled in an advance in earnings of around 16% for the current trading year to March 2022. And with the shares near 199p, the forward-looking earnings multiple is just below 15.
I think the valuation looks fair, but there are risks. For example, the company lists one major customer responsible for around 16% of overall revenue. And another gave the firm 14% of overall revenue. Loss of either or both would hurt Supreme’s performance and likely damage the share price.
Nevertheless, I think Supreme is a UK share for me to buy. And I’m likely to hold for at least five years as the growth story develops.