UK Micro-Cap Gem: Doubled EBITDA in 3y, Still Trading Below 5x?
Short-read: 6 minutes
Today I'm pulling back the curtain on a fundamentally undervalued UK stock that's largely ignored by the market and has little coverage in the public domain. It's nearly doubled its EBITDA in just 3 years, holds a net cash position, yet still trades at a compelling ~4.5x EV/EBITDA! Check out my quick teaser below and let me know in the comments/DM if you’d like to see the full, in-depth report I’m considering!
Investment Highlights:
Highly cash generative business given its asset-light nature with low capex needs
Diversified portfolio of consumer brands with a strong market position in the UK and a large distribution network (including Tesco, Sainsbury's and Morrisons)
Fast growing business with ~22% revenue CAGR over the last 3 years
Trades at ~4.5x EV/EBITDA (FY25E) and ~7.7x P/E (FY25E), which is relatively cheap for a consumer business
Dividend yield of ~3% underpinned by growing, recurring cash flows
Strong M&A track record with ability to self-fund acquisitions
Healthy balance sheet, with a positive net cash position (even after investing £25m in M&A this year)
Disclaimer: Please note this article is not intended as financial advice, and that the writer is currently a shareholder in the company here covered.
Company Overview
Supreme Plc (AIM: SUP) is a vertically integrated business in the fast-moving consumer goods (FMCG) industry in the UK, with a diversified portfolio of consumer brands with distribution and manufacturing capabilities. The group focuses on high-repeat, non-discretionary products in the following categories: vaping, lighting, batteries, sports nutrition, soft drinks and branded distribution (the latter mainly comprises the master distribution agreements for Elf Bar and Lost Mary brands, which Supreme distributes for 3rd parties to major UK retailers such as Tesco, Morrisons and WHSmith Travel). The stock is listed on AIM in the UK and has a market cap of ~£182m at the latest share price of 155p at the time of writing (May 4, 2025).
Supreme has grown from ~£131m in sales in FY22 to ~£235m expected in FY25E (~80% total growth or ~22% CAGR), leveraging multiple growth levers both organically and through M&A, including entering new categories and signing new distribution agreements. The company is expected to generate ~£40m in EBITDA in FY25E (almost double vs FY22 EBITDA of ~£21m), which it can continue to deploy effectively in its proven M&A engine, given its high cash conversion with limited capex needs. The balance sheet remains healthy with positive net cash expected at year end, even after deploying ~£25m in acquisitions this year. This is essentially quite similar to a bolt-on play typical of private equity-backed businesses, but with the additional benefit of no existing leverage. Hypothetically, if Supreme generates ~£25m in free cash flow next year (roughly in line with broker estimates), they could acquire another ~£5m of EBITDA next year representing a boost of +13% to EBITDA growth just through M&A. This is before any incremental leverage, which the company could tap into to fund larger deals, as with ~£40m of EBITDA they could get significantly more levered if Management wants to.
What Is The Market Missing? I See 2 Main Drivers:
Regulatory noise around disposable vapes: Fears surrounding disposable vapes are overshadowing the fundamentals. As I'll detail in the last section, these concerns appear overblown and discounted by the current valuation.
Still failing to see Supreme as a diversified platform of consumer brands, not just a distributor: The market hasn't caught up to Supreme's transformation into a well-established platform of diversified brands with manufacturing and distribution capabilities. Supreme is now a scalable consumer platform with a vast network across the UK driving ~22% revenue CAGR over the last 3 years. The Management team is strong and well-aligned with shareholders, with a deeply invested CEO (owns 55.98% of the equity) with a proven track record, having built the company from employee #3 to a 500+ strong team.
Regulatory Noise: Potential Catalyst For Re-Rating
The upcoming UK ban on disposable vapes, kicking in next month (June 2025), is more than just a regulatory hurdle – I view it as a potential catalyst for the stock. The catalyst isn't the ban itself, but the clarity that follows. The regulatory risk is already fully reflected in the share price in my view, and there is potential for re-rating once we see the actual P&L impact of the regulation in the trading updates over the coming fiscal year. I note a few things that lead me to believe the regulatory risk is overblown:
Firstly, Supreme is present in both disposable and re-chargeable vape segments, and within its disposable vape revenues, a large portion comes from 3rd party distribution agreements rather than from Supreme-owned brands and therefore have lower margins. Disposable vapes “only” represent ~£9m of Supreme’s EBITDA, meaning that even if 100% of that demand was lost, the company would still trade at ~5.8x EV/EBITDA which I still view as relatively cheap for a consumer business.
Secondly, Management expect >50% of the disposable vape demand to transition to re-chargeable pods. Demand for nicotine products tends to be very sticky, and for those of you who do not live in the UK, it’s important to note that vapes are a much cheaper alternative to cigarettes. Refillable vapes can result in over £2k in savings per year for an average smoker of 10 cigarettes per day (see the chart below).
Source: https://www.vapesuperstore.co.uk/blogs/news/save-money-with-vaping
Lastly, Supreme is well-positioned to take market share as demand moves away from disposable vapes, as it has ~30% market share in e-liquids for re-usable vapes in the UK. It owns the well-known brands 88Vape and Liberty Flights, whose products are manufactured fully in-house and therefore yield higher margins than the disposable vapes distributed for 3rd parties.
I see a powerful catalyst on the horizon for this stock to significantly re-rate higher within the next 12-24 months. The market appears to be mispricing the risk around disposable vapes – even assuming a major hit to those revenues (50-100%), the stock remains remarkably cheap on any metric, in my view. Beyond this misperception, my confidence rests on Management's proven ability to grow Supreme by entering new high-growth segments and securing key distribution deals, as they have done historically. If they continue delivering on the strategy of reinvesting free cash flow into low-multiple acquisitions, the stock looks like a compelling long-term compounder. And with a market cap under £200m, there is still plenty of runway for growth in my opinion.
Disclaimer: The content presented on this website is strictly for informational and educational use. It should not be considered as financial or investment advice, nor does it guarantee any profit. While we strive for accuracy, errors may be present; please conduct your own due diligence. Opinions expressed are the author's own and may change without notice.
Disclosure: At the time of this article's publication, the author holds shares in Supreme Plc. This position may be altered or liquidated at any time without prior notification.