Supreme PLC (LON:SUP) is a ‘buy’ for Berenberg as analysts expect it to grab further share in the growing vaping market.
The investment bank initiated coverage with a 220p target price as it deems the shares “good value” due to a 3.6% dividend yield and double-digit earnings growth.
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The Manchester-based company is an importer, manufacturer and brand owner of consumer products, branching out from an initial specialisation in the distribution of batteries into light bulbs, vaping and sports nutrition.
It distributes to various UK major discount retailers, grocers and wholesale channels, in growing categories such as vaping, sports nutrition, lighting, household and vitamins.
The AIM-listed firm is forecast to deliver group revenue and underlying earnings (EBITDA) growth of 15% and 13% respectively over the next two years.
Berenberg estimates Supreme’s current market share for vaping in the UK is 30%, gained as a result of faithful customers, bans on advertisements and competitive prices.
Only 7.1% of UK adults currently use e-cigarettes, while 14.4% still use traditional cigarettes and analysts believe there will be more growth in vaping, with Supreme’s 88vape brand expected to capitalise on trends.
The firm managed to generate 59% returns on invested capital in 2020 due to the asset-light nature of its distribution business and the efficiency with which it has set up its own manufacturing capabilities in vaping and sports nutrition.
With little capital investment required to support its continued growth over the coming years, analysts reckon that Supreme will end up with a £12-13mln cash position by March 2023, paving the way for special dividends.
Shares rose 2% to 189p on Tuesday morning.