Hello Devin, really enjoying your articles. I am myself an investor of Imb and bats, and I am interested in adding STG for diversification and the possibility of M&A. However, there are a few things I like more with BTI/IMB - I would love to hear something that you like about STG more than in the other two.
1. IMB/BATS valued a bit lower still from P/E / EV/EBIT perspective
2. Ken Dart as a strong owner, do you know anything about strong owners in STG?
3. I can't get out of my head that I think pouches are more natural for IMB/BATS. If you have cigs in all small shops in the world, why not throw in some pouches too? Synergies!
Cigars are not as wide spread and I would believe the synergies would be alot smaller. What do you think? would love to hear your thoughts. Great piece!
Thanks for your thoughtful questions, Carl. The most unique aspects of STG are its size and its portfolio of cigars. These are both central pillars in my initial investment thesis in explaining why I believe the company is overlooked and underappreciated. As for your specifics:
1. Their current multiples are indeed lower. IMB provides the clearest communication and the most aggressive capital returns. BAT has a unique portfolio, massive distribution, and the highly valuable ITC stake. As highlighted in my last few pieces on STG, I do not think that the company's current earnings are entirely normalized considering the recent investments. At the same time, should Growth Enablers continue to rapidly bear fruit, the reinvestment rate may remain elevated. This would increase long-term value, but weigh on capital returns in the medium-term.
2. I highlighted the largest STG shareholders in my first writeup. They have had a long history with STG and hold influence over major movements, but none appear as intimidating as Ken Dart, who has quite a colorful history. Perhaps I need to dedicate future writings on both.
3. They all have different strengths in terms of distribution. STG owns retail superstores (cigars, alcohol at the bars, and potentially room to push pouches in the future.) But it's strongest channels are its US online presence as well as the relationships it holds with distributors and retailers in Europe.
4. Regarding synergies, I assume you are asking about the most recent deal. Without more data, I must concede there is limited visibility to what could be recognized in synergies. I will note, 80% of the business is legacy with direct category and geographic overlap with STG's current operations, and they have had a strong track record on M&A. Next Q we should get much more valuable information to parse it out.
I really appreciate your answer! You truly know this sector. I will make sure to go through your older pieces covering STG and will stay tuned for more from you. Hearing your thoughts in an article covering ownership-structures on the sector would be truly interesting. Cheers!
There are still smaller, profitable tobacco players in Europe. I would know 3 or 4 smaller players in Germany alone that would be lucrative takeovers. The regulation for tobacco becomes more and more costly. Scandinavians Europe strategy seems to be the last man standing and integrating all the small players into STG.
Thanks Ulrich. And agreed -- there is no shortage of potential M&A targets. There are droves of smaller, well-managed businesses that simply can't recognize the same kind of benefits as an operator at the scale of STG. While 'synergy' is often tossed around as a buzzword, STG most definitely knows how to execute on that front - the Agio deal, highlighted in my first STG piece, shows just how extreme the benefits can be (though, that wasn't exactly a small deal, relatively speaking.)
Thanks for the update. Its impressive what this company has done given the challenging regulatory environment and evolution of consumer desires for their products.
Echoing Tian's comment, I sincerely appreciate the thorough coverage you give this group of companies. If I ran a fund I would not hesitate to pay for your insights.
I found it curious that management downplayed a bit the importance of the Mac Baren pouch business for the acquisition, highlighting instead smoking tobacco as the driving force.
Thanks, Luis. Over the last few years since starting Invariant, I've had the opportunity to speak with quite a few fund managers and other professionals - it's always a pleasure to exchange ideas. Invariant will be moving towards a semi-paid model, with the majority of content still free and fully accessibly to all, with specific pieces catered to paying subscribers. I aim to deliver valuable and enjoyable writing, and I will be sure to publish my intent for the transition soon.
I am not entirely surprised by management keeping focus on the pipe and fine-cut tobacco business. While briefly highlighted in my piece, I think the total synergies to be recognized likely tally much higher than the ballpark figure, and if that is true, the core business will have been a wonderful addition at the price paid. I look forward to getting more concrete figures next Q.
Devin, I’m sure you’ll publish a post soon to discuss STG’s Q3 results, but the “ballpark synergies” of DKK 35M that you hypothesized, are they the same “concept”as the DKK 150M+ that STG just talked about, or are we talking about different things?
The CFO on the CC: “And let me add here, when we talk synergies from Mac Baren in the level of DKK150 million, that is excluding any potential future synergies or in-sourcing our own production to STG simply because we don't have a clear plan yet.”
I understand they’ll need to spend DKK 150M to integrate Mac Baren, but assuming the synergies pan out, that’s one hell of an investment, no?
I'll be publishing the Q3'24 STG note this week. There is the additional related capex to consider, but I'll just say, I believe my initial ballpark estimates for the deal were considerably conservative.
Hello Devin, really enjoying your articles. I am myself an investor of Imb and bats, and I am interested in adding STG for diversification and the possibility of M&A. However, there are a few things I like more with BTI/IMB - I would love to hear something that you like about STG more than in the other two.
1. IMB/BATS valued a bit lower still from P/E / EV/EBIT perspective
2. Ken Dart as a strong owner, do you know anything about strong owners in STG?
3. I can't get out of my head that I think pouches are more natural for IMB/BATS. If you have cigs in all small shops in the world, why not throw in some pouches too? Synergies!
Cigars are not as wide spread and I would believe the synergies would be alot smaller. What do you think? would love to hear your thoughts. Great piece!
Greetings Carl from Sweden
Thanks for your thoughtful questions, Carl. The most unique aspects of STG are its size and its portfolio of cigars. These are both central pillars in my initial investment thesis in explaining why I believe the company is overlooked and underappreciated. As for your specifics:
1. Their current multiples are indeed lower. IMB provides the clearest communication and the most aggressive capital returns. BAT has a unique portfolio, massive distribution, and the highly valuable ITC stake. As highlighted in my last few pieces on STG, I do not think that the company's current earnings are entirely normalized considering the recent investments. At the same time, should Growth Enablers continue to rapidly bear fruit, the reinvestment rate may remain elevated. This would increase long-term value, but weigh on capital returns in the medium-term.
2. I highlighted the largest STG shareholders in my first writeup. They have had a long history with STG and hold influence over major movements, but none appear as intimidating as Ken Dart, who has quite a colorful history. Perhaps I need to dedicate future writings on both.
3. They all have different strengths in terms of distribution. STG owns retail superstores (cigars, alcohol at the bars, and potentially room to push pouches in the future.) But it's strongest channels are its US online presence as well as the relationships it holds with distributors and retailers in Europe.
4. Regarding synergies, I assume you are asking about the most recent deal. Without more data, I must concede there is limited visibility to what could be recognized in synergies. I will note, 80% of the business is legacy with direct category and geographic overlap with STG's current operations, and they have had a strong track record on M&A. Next Q we should get much more valuable information to parse it out.
I really appreciate your answer! You truly know this sector. I will make sure to go through your older pieces covering STG and will stay tuned for more from you. Hearing your thoughts in an article covering ownership-structures on the sector would be truly interesting. Cheers!
Good article as always.
There are still smaller, profitable tobacco players in Europe. I would know 3 or 4 smaller players in Germany alone that would be lucrative takeovers. The regulation for tobacco becomes more and more costly. Scandinavians Europe strategy seems to be the last man standing and integrating all the small players into STG.
Thanks Ulrich. And agreed -- there is no shortage of potential M&A targets. There are droves of smaller, well-managed businesses that simply can't recognize the same kind of benefits as an operator at the scale of STG. While 'synergy' is often tossed around as a buzzword, STG most definitely knows how to execute on that front - the Agio deal, highlighted in my first STG piece, shows just how extreme the benefits can be (though, that wasn't exactly a small deal, relatively speaking.)
Thanks for the update. Its impressive what this company has done given the challenging regulatory environment and evolution of consumer desires for their products.
Thanks, Doug.
Echoing Tian's comment, I sincerely appreciate the thorough coverage you give this group of companies. If I ran a fund I would not hesitate to pay for your insights.
I found it curious that management downplayed a bit the importance of the Mac Baren pouch business for the acquisition, highlighting instead smoking tobacco as the driving force.
Thanks, Luis. Over the last few years since starting Invariant, I've had the opportunity to speak with quite a few fund managers and other professionals - it's always a pleasure to exchange ideas. Invariant will be moving towards a semi-paid model, with the majority of content still free and fully accessibly to all, with specific pieces catered to paying subscribers. I aim to deliver valuable and enjoyable writing, and I will be sure to publish my intent for the transition soon.
I am not entirely surprised by management keeping focus on the pipe and fine-cut tobacco business. While briefly highlighted in my piece, I think the total synergies to be recognized likely tally much higher than the ballpark figure, and if that is true, the core business will have been a wonderful addition at the price paid. I look forward to getting more concrete figures next Q.
Devin, I’m sure you’ll publish a post soon to discuss STG’s Q3 results, but the “ballpark synergies” of DKK 35M that you hypothesized, are they the same “concept”as the DKK 150M+ that STG just talked about, or are we talking about different things?
The CFO on the CC: “And let me add here, when we talk synergies from Mac Baren in the level of DKK150 million, that is excluding any potential future synergies or in-sourcing our own production to STG simply because we don't have a clear plan yet.”
I understand they’ll need to spend DKK 150M to integrate Mac Baren, but assuming the synergies pan out, that’s one hell of an investment, no?
I'll be publishing the Q3'24 STG note this week. There is the additional related capex to consider, but I'll just say, I believe my initial ballpark estimates for the deal were considerably conservative.
Awesome, looking forward to your note!
Thank you for your thorough coverage of nicotine companies, especially lesser known ones like Haypp and STG.
Thanks, Tian. I appreciate your support and your added thoughts.
Time for a pipe tobacco revival? Macbaren makes some great ones.
I know you're a fan!