Swedish Match: Cigars Spin-Off And FDA E-Vapor Action Help Low-Teens Return

(Preview) Company Update (SWMA SS) (Buy)

Summary

• Recent news on the U.S. Cigars spin-off and the FDA acting against e-vapor are both positive for our investment case.

• The U.S. Cigars business has resilience and strong growth, and should have solid valuation multiples and be able to borrow at low rates.

• Comparable listed companies and transactions have EV / EBIT multples of 13-14x, but we believe the U.S. Cigars deserves a higher multiple.

• The new Swedish Match should also get a higher multiple. Overall, we believe the separation will increase its per-share value by 5%.

• With shares at SEK 81.20, we expect a total return of 54% (14.5% annualized) by 2024 year end. The Dividend Yield is 1.8%. Buy.

Introduction

We review our investment case on Swedish Match AB ("SWMA") after recent news on spinning off its U.S. Cigars business and the FDA acting against e-vapor through the Premarket Tobacco Application process.

We initiated our Buy rating on SWMA in September 2020, and have reiterated it regularly since. In the year since our initiation…