CONSUMER STAPLES: Scandinavian Tobacco; Q3 earnings call

(STGDC; Baa3/NR) (Equities -7%)

For take on numbers from before see here. It wasn't complete surprise and FY guidance is little changed. Couple of asides;

• It is flagging continued MSD volume declines in the US handmade cigar market - it sees no signs of stabilisation there. For the entire segment (1/3 of group) it only reported a -1% organic decline helped by international market growth, retail stores +11% LFL and online +2%. It sees the consumer seeking 'experience based consumption' (hence continuing to open new stores - these can have bar/lounge areas etc.). It also observes trading down in the US.
• On tariffs it says no production in the US currently - i.e. may be exposed there.

What remains more interesting to us is leverage trending above target on 1) DKK535m (€130m) bolt-on it did in cash 2) sizeable equity pay-outs totalling DKK1.4b (€200m). Both are in face of flat earnings profile (pro-forma) and we would not rule out continued M&A particularly in traditional/core cigars (consolidate market to offset volume declines). It is guiding to FY leverage at net 2.7x - up from 1.9x last yr and well above recent years that have been <2x. Target is 2.5x which it says it will come into in years ahead. We do see this years in Moody's downgrade threshold.

Net net on RV we still are not too concerned; it has a 1.25% step-up protection and trades 90bps wide to peers (a portion of that may be warranted). Larger machine rolled market is showing stabilisation (market -1%) and synergies from most recent bolt-on should eventually kick in to help margins.

Language on step-up (€29 Prospectus);

• "Any Rate Adjustment shall be effective from and including the Interest Payment Date immediately following the date of the relevant Step Up Event or the relevant Step Down Event"
  • Interest Payment Dates are annual on 12th Sept.
• "Step Up Event means (i) the first public announcement by any Rating Agency of a Rating Decrease, OR (ii) the failure to assign, or withdrawal of a Rating, by any of the Rating Agencies, unless in each case another Rating Agency assigns or maintains a Rating equal to or higher than the Specified Threshold."
  • "Rating Decrease means a decrease in the Rating to below the Specified Threshold."
  • "Specified Threshold means BBB-/Baa3 or the equivalent"
• Similar clause for step down event (i.e. if reinstated with IG rating)

We are hearing of buying today. Q4/FY results come 6th of March.