Quick thoughts on STG and my views on the company:
STG is a tobacco company operating in the so-called defensive sector. How defensive a tobacco company can be is another question, given the associated political hate campaigns, but that's the reality. It's a challenging sector, where the future primarily works against them.
But is STG just a dying company?
Is STG a company set for extreme growth? No, it is not.
Do I consider them defensive? Yes, absolutely. But why?
Do I own them? No, I don't, but they are a top 3 buy at current values around 100 DKK, even with current exchange rates.
How do I value Scandinavian Tobacco Group?
We can start with the fact that I find them cheap right now, but always remember the political and cultural risk associated with this stock.
So with this brutal start, how can I conclude that this is one of the next companies I plan to buy into?
Culture: Simply put, I personally believe they are in a timeless market. They have clear plans for what they want to achieve and are well-diversified across different products, with the most interesting area being the luxury segment: hand-rolled cigarettes.
Dividends: They offer about an 8% dividend at the current price level and have shown that the current economic climate isn't something they are significantly concerned about.
Share Buybacks: Even with nearly an 8% dividend, the number of shares has decreased by almost 15% since 2018.
Low Valuation: A P/E ratio of under 10 suggests that no growth is expected, and as long as you expect them to maintain inflationary growth in the future, the company is acceptably priced and will yield dividends between 7-8% of the purchase value as long as they maintain their income.
It is important to understand what you're getting into. The company has had little top-line growth, so even though they have nearly doubled the bottom line, this is something a buyer needs to be aware of.
Strategy:
During the last Capital Markets Day (CMD), the strategy was mainly divided into five parts.
Since hand-rolled cigars are one of the main pillars of the strategy, I'll delve into this a bit.
36% of the revenue comes directly from this luxury segment, which has proven to be resilient in the current economic climate.
They produce and distribute their own brands and have built up high-quality products over time, which adds some extra strength to the stock.
Other areas of focus include fostering a strong company culture, streamlining and modernizing distribution, and pursuing acquisitions. They have opened more stores and made several acquisitions over time.
Economic Stock Analysis:
From an economic perspective, I think in this stock analysis that Scandinavian Tobacco Group has performed from good to quite satisfactory.
It depends on what one is looking for in a company, and based on the price, I find the company very interesting.
They have shown economic growth over time, managed well during COVID-19 and in the current periods, and have demonstrated that they have a platform that is not overly dependent on strong economic conditions.
Statement
With almost a 50% increase in the top line, we start off modestly. But there has been positive growth over time.
What really stands out is the growth in results. In 2014, the profit was 639.8, and in 2023, it was 1182.4. Here, there's nearly a doubling of the bottom line, despite 2023 showing some weaknesses compared to the previous two years. They have worked on improving the margin, which they have succeeded in doing.
NET INCOME | EBIT | RESULTS | EBIT MARGIN | MARGIN | |
2014 | 6126 | 907.7 | 639.8 | 14.82% | 10.44% |
2015 | 6732.3 | 941.1 | 667.6 | 13.98% | 9.92% |
2016 | 6745.6 | 956.8 | 681.5 | 14.18% | 10.10% |
2017 | 6463.5 | 913 | 711.6 | 14.13% | 11.01% |
2018 | 6717.5 | 737.5 | 665.5 | 10.98% | 9.91% |
2019 | 6870.3 | 977.2 | 747.7 | 14.22% | 10.88% |
2020 | 8005.9 | 985.6 | 677.9 | 12.31% | 8.47% |
2021 | 8232.7 | 1814.2 | 1390.6 | 22.04% | 16.89% |
2022 | 8762.2 | 1953 | 1476.3 | 22.29% | 16.85% |
2023 | 8730.9 | 1638.3 | 1182.4 | 18.76% | 13.54% |
Balance Sheet
Personally, I believe that the improvement in results is not sufficient given the level of debt they have taken on. At the very least, I would like to see a reduction in interest-bearing debt moving forward if they cannot demonstrate direct growth in their results over the next couple of years.
Aside from that, they have good control over their debt and should be able to pay it down over time without significant difficulties.
Liquidity is at one of its lowest levels since 2014 (99.6), which is a bit disappointing to see.
Overall, however, the balance sheet appears strong.
Interest debt/leasing | Liabilities | Equity | Total Assets | |
2014 | 2958.3 | 5074.9 | 9087 | 14161.9 |
2015 | 3337.9 | 5546 | 8997.9 | 14543.9 |
2016 | 2730.7 | 4990.8 | 9272.9 | 14263.7 |
2017 | 2606.3 | 4542.2 | 8448.2 | 12990.4 |
2018 | 2658.1 | 4584.9 | 8818.2 | 13403.1 |
2019 | 2908.9 | 4769.3 | 9102.7 | 13872 |
2020 | 3057.9 | 5623.7 | 8372.3 | 13996 |
2021 | 3115.9 | 5615.9 | 8967.8 | 14583.7 |
2022 | 3432.5 | 5780.5 | 9341.6 | 15122.1 |
2023 | 3961.6 | 6419.4 | 9434 | 15853.4 |
Cash flow
Operations have increased slightly since 2014, but it's not something to celebrate excessively.
They pay out around 50% of their operational earnings as dividends, and in years when they make fewer investments, they engage in share buybacks. The company has a relatively stable cash inflow
OPERATIONS | INVESTMENT | FINANCE FLOW |
1056 | -471.2 | -468.2 |
1285.4 | -228.8 | -1028.8 |
1357.8 | -218.6 | -1177.7 |
1048.5 | -93.7 | -896.7 |
784.5 | -510.6 | -572.9 |
1299.6 | -49.9 | -672.2 |
1585.4 | -1751.7 | -601.9 |
1566.7 | -177.5 | -1337.8 |
1392.5 | -131.8 | -1401.5 |
1347 | -875.3 | -386.2 |
Quick Update on Q1-Q2 2024
It's also worth mentioning that the first two quarters of 2024 have been disappointing, with an increase in the top line but a further decline in margins.
However, it's not all negative. They continue to demonstrate resilience, especially in a market where interest rates have likely peaked.
Resultat | Q1-Q2 2023 | Q1-Q2 2024 |
Inntekt | 4187.7 | 4314.1 |
Kostnad | -3423.5 | -3676.7 |
EBIT | 764.2 | 637.4 |
Lånekostnader | -37.4 | -93.4 |
EBT | 726.8 | 544 |
-163.5 | -122.4 | |
Resultat | 563.3 | 421.6 |
cash flow | Q1-Q2 2023 | Q1-Q2 2024 |
Drift | 120.3 | 175.3 |
Investeringer | -722.4 | -209.6 |
Finansiering | 698.7 | -57.3 |
Assets | 11292.8 | 11401.3 |
Current Assets | 5056.8 | 5026.7 |
Cash | 112 | 89.6 |
Inventory | 3576 | 3506.8 |
Total Assets | 16349.6 | 16428 |
Equity | 8994.3 | 8880.7 |
Gjeld | 7355.3 | 7547.3 |
Langsiktig Gjeld | 5921.2 | 6065.5 |
Kortsiktig Gjeld | 1434.1 | 1481.8 |
Leasing kostnader | 4956.3 | 5252.6 |
Strengths and Competitive Advantages
Resilience: The company is resilient in various market conditions and has diversified broadly within the tobacco industry.
Shareholder-Friendly: The company provides strong dividends and buys back shares when financially able. Since 2018, the number of shares in the market has decreased by 15%. Considering that the company has provided 5-8% in dividends each year since 2018, it has delivered solid value returns over time.
Market Control: With extensive experience and a focus on quality, STG has developed expertise and a distribution system that takes time and experience to build.
Challenges and Risk Factors
Political Risks: A significant portion of revenue comes from the West, where there is substantial political risk related to changes in regulations governing the tobacco industry.
Lack of Necessity: Tobacco does not fulfill any essential needs beyond those created by cultural habits. This presents the risk that the product may not be needed or desired in the future.
Lack of Growth: The company has shown very little growth in cash flow and top-line revenue, which is crucial to consider before investing.
Conclusion
Future Outlook:
Dividend Yield: I anticipate that the company will regain control over its margins and continue to provide shareholder value in the form of liquidity.
Growth Potential: The company has the potential to continue growing and become a larger entity that provides higher liquidity over time, with acquisitions serving as a good example of this strategy.
Summary:
This is a company I developed a fondness for while analyzing it, but there are some pitfalls to keep in mind.
One major concern is the lack of top-line growth, so you must expect shareholder returns via either A: Dividends or B: Share buybacks to increase the company's stock price.
Additionally, it’s important to remember the political risk inherent in this stock, as the tobacco industry could suddenly face adverse effects from new regulatory changes.
I see STG as a solid company to invest in, even with the existing political risks.
However, if you believe there is no place for tobacco in the future, I would be cautious about investing in this company.
If you want to dive deeper into the numbers, you can find the stock on my index page, where I’ve provided Google Sheets read access for those interested.
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