CONSUMER STAPLES: Scandinavian Tobacco; Q3 Results

(STGDC; Baa3/NR) 

It is now guiding to leverage moving outside its target (net 2.7x vs. 2.5x) and we do see that in Moody's downgrade threshold. Not necessarily bad news for €29s that have a 1.25% coupon step-up on HY ratings (BBB/BB index is only spread 92bps). The 29s were a cheap view of ours in primary and have performed well (-42bps vs. €IG +2, both against swap). Similar to then we don't see strong positive catalyst ahead but standalone valuation (trades +90 wide of the widest among majors) and step-up protection together may be enough carry for some. As we said in primary please size risk to scale of co; this is €1b in sales vs. majors doing €10-30b - and that is before accounting for lower margins (ex. Imperial majors do 40-handle on EBITDA vs. STG running low 20s - dragged on by labour intensive hand-made cigars).

• Q3 revenue at DKK2.4b (€320m), +0.1% LFL and leaves YTD +0.9%
  • machine rolled (1/2 of group) +3%, handmade cigars (~1/3 of group) -1%, Next-Gen (4%) +2%
  • acquisition of Mac Baren (Nordic co specialising in pipe Tobacco; purchased for €70m) boosted reported revenue by +7%
  • in-line with peers its reporting strong growth in pouches (under next-gen); +72% in XQS brand. As we have said beware evolving regulation in the high-growth segment - regardless STG's exposure is small.
• EBITDA margin of 23.4% (-310bps) and YTD at 22% (-260bps)
  • It says inclusion of acquired Mac Baren and investments in the NGP XQS brand drove that
• Weak FCF of DKK275m (€37m) vs. DKK622m last year
  • driven by a WC drag which turned negative vs. positive DKK303m last year
• Net interest bearing debt is up from 4b to DKK5.8b (€780m)
  • net leverage at 2.9x and is guiding to 2.7x at year end - up from 1.9x last year and above target 2.5x
  • small cash on hand against above metrics
• Equity pay-outs have totalled DKK1.4b (€190m) YTD - similar to recent years and was not scaled by for M&A spend

Guidance;

• Sales at DKK 9.1b (€1.2b)
• EBITDA margin 22-23% (prev. 22-24%)
• FCF before acquisitions DKK0.8-0.9b (€110-120m) prev. 0.8-1b.