Scandinavian Tobacco (STGDC; Baa3/NR) Final thoughts

WNG €300m 5Y FINAL MS+250 vs. FV 210 (40bp NIC)

• A cheap view, valid at 230 and above.
• Grey trading 10-15 tighter

• So we mentioned above we did not know percentage of next-gen products or NGP's (the growing stuff - vapes, pouches etc.) - but assumed it was small given co started investing in it 2 years ago. Answer is 6% of group sales in 2Q and its revenues organically doubled yoy (tripled including acquisitions).
• Please note this is different to what it refers to as "growth enablers" (12% of group) which includes international sales of handmade cigars, retail stores and next-gen products. As we said before it views stores - including cigar lounges - as attractive proposition and is adding this to growth segment. It saw 5% same-store sales in retail for Q2 and notes "accretive to both EBITDA margin and ROIC" - in which case little issue from us.
• On capital allocation alongside net 2.5x target it has a goal of growing the annual dividend. It paid out 62% of net profit in dividends last year and did another 16% in buybacks. This year is running at pace with DKK1.2b (€130m) vs. DKK820m this time last yr. This is normal for Tobacco co's - need to give something for equity holders - but still never nice to see. The leverage history & target - alongside 1.25% step-up - makes us little worried of BS getting out of hand.
• Co is small scale and narrow focused (on cigars) but consolidating market through M&A can be a profitable strategy - which seems to be its intention. We would not expect organic growth and would hope for continued offsetting of the declining market size/volumes through combination of market share gains, pricing and NGP growth.
• The 25s give a short trading history (issued as 5Y) and it is a typical BBB tobacco - tends to decompress during broader market weakness despite the non-cyclical exposure. Our guesses on the driver of that is a higher liquidity premium on smaller investor universe and perhaps ESG impacted inventory management (last in, first out). It traded as wide as MS+250bps late last yr- it's being tendered at MS+105 now.

Q3 results come in 2-months on the 12th of November.