Supreme simmers up Typhoo Tea acquisition

Supreme (SUP:175p), a manufacturer that counts B&M, Home Bargains, Poundland and the major supermarket chains as customers, is acquiring the trade and selected assets of Typhoo Tea out of administration. Supreme expects the integration of the business to proceed without disruption to existing operations or customer service levels.

Established in 1903, Typhoo Tea was the first pre-packaged tea brand in the UK, and has expanded its product offering from traditional black and decaffeinated black teas to include white and lemon instant flavours, herbal and fruit tea infusions. The business also offers a selection of coffees across a portfolio of brands.

It looks like a cracking deal for Supreme. That’s because management plans to operate Typhoo Tea on a capital-light, outsourced manufacturing model that can generate a gross profit margin of 30 per cent on a much reduced overhead base. The business generated revenue of £20mn in the 2023-24 financial year, implying annualised gross profit of £6mn under Supreme’s ownership. Analyst Paul Hill of PMH Capital estimates that after deducting advertising spend, Typhoo should generate a 10 per cent operating profit margin, suggesting a 20 per cent return on capital. Moreover, the £10.2mn acquisition price includes £7.5mn of stock and trade debtors, so effectively Supreme is buying a well-established brand for a few millions of pounds.

It means that the group’s non-vape revenue now exceeds £120mn, accounting for half of total revenue, highlighting the ongoing diversification of the product mix. Strategically, the acquisition broadens Supreme’s UK retail network, adding more high street names including Holland and Barrett, which could generate additional cross-selling opportunities across the group’s product areas.

The £10.2m consideration is being funded from Supreme’s cash resources, so analysts expect net cash of around £8mn at the financial year-end (31 March 2025). Although the transaction will have minimal impact on current year earnings, it should offer upgrade potential for the 2025-26 financial year assuming the integration goes well. Furthermore, with £50mn of debt facilities available, expect more bolt-on acquisitions to diversify Supreme’s revenue mix and mitigate the financial impact of the ban on the sale of disposable vapes which comes into effect in June 2025 (‘Supreme’s value proposition gains traction’, 26 November 2024).

In the circumstances, I am upgrading my recommendation as I feel investors are likely to warm to the earnings-enhancing acquisition. Trading on forward price/earnings ratios of 8.2 (2025) and 9 (2026), the shares could re-rate to analysts’ target prices (225-240p) more quickly than I had previously envisaged. Buy.

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