Title: This Is Why I Hunt for Unpopular Stocks | Scandinavian Tobacco
Show: Peter Lukacs Research (YouTube)
Guest: Peter Lukacs
Date: 2026-09-02
URL: https://youtu.be/569mq63f-zM
Length: 19:13
Note: YouTube auto-transcript; fillers (uh/um/you know/like/I mean) and stutters removed, wording otherwise verbatim. Obvious ASR fixes: "Scandinavia and Tobacco" = Scandinavian Tobacco (Group); "dive der" = dive deeper; "vin" = win; "via nicotine pouches" = while nicotine pouches; "EB"/"EVA margin"/"IBIDA" = EBITDA / EBITDA margin; "UT refunds" = US tariff refunds (as later stated); "depth" = debt; "mesh rolled" = machine-rolled; "pipe to gako" = pipe tobacco; "rotor" = ROTA (return on tangible assets); "BAA3" = Baa3; "bare"/"barricade" = bear / bear-case; "b case" = bull case; ",75" (13:04) = 1,075 (the guidance midpoint); "reuse the depth" (06:56) = reduce the debt; "leveraging" (15:36) = deleveraging. Per-share dividend figures are spoken without decimals ("360 to 660", "510") — i.e. DKK 3.60–6.60 / 5.10 per share (40–60% of DKK 9–11 adjusted EPS); "3 million euros of bond" left as spoken.

(00:00) Good day investors. Today we are going to revisit the thesis for Scandinavian Tobacco, plus take a look at their second quarter 26 results. First, we're going to look at their operations, then financials, and most importantly update the valuation for the stock. That said, if you want to dive deeper, feel free to check out my YouTube membership where I post weekly how and why the portfolio changed, what's on my watch list.
(00:24) And with the boardroom tier, you can get access to a discord channel where we can have direct discussions. And the stock is down 24% year to date. So in March, you can see this drop off. The shares crashed almost 30% after disappointing full-year results. The biggest shock was close to 50% dividend cut alongside weaker earnings, margins, and free cash flow.
(00:44) Now 26 guidance offered little near-term growth. Some of the cash flow weakness was temporary due to ERP related receivable delays but overall the crash reflected weak execution the dividend reset and the sharp loss of investor confidence overall. That said the stock now looks extremely attractive from a valuation perspective but let's dive deeper.
(01:12) By the way, the dividend is somewhere around 6.9%ish, but I'll talk more about that. Now, the big picture for the company is their focus 2030 strategy, which is pretty simple. The company wants to become a more focused cigar and nicotine company. The core ambition is to remain the global leader in cigars while turning the business back towards sustainable growth.
(01:40) That comes down to three priorities. First as you can see win handmade cigars in the US. Second defend its leadership in machine rolled cigars in Europe and build a meaningful European nicotine pouch business. Now supporting this is better digitalization, stronger customer focus, simpler execution and tighter cost and performance management.
(02:05) The company underperformed many of its metrics over the past let's say couple of years. So we'll see how they can execute on this. By 2030, the company wants its European machine rolled cigars, smoking tobacco business to be stable, while growth comes mainly from handmade cigars and nicotine pouches.
(02:22) The opportunity is clear. Traditional tobacco categories are expected to grow only 1 2% annually while nicotine pouches are projected massive growth 18% plus. So it's essentially stabilize the legacy cash engine while expanding into growth. Now the company already has a strong market position across cigars and smoking tobacco while nicotine pouches are growing quickly but still representing only 4%ish of their total sales.
(02:53) If you think about the problem what the problem really is is financial execution performance has been below management's ambitions. So they were I don't know overly optimistic. So that's also why we have to take any guidance with a grain of salt. In general, you have to do that with management, but if they have a good track record of execution, you can be more positive.
(03:16) Now, it doesn't seem to be the case in this situation. Leverage is above its two and a half leverage ratio target and old dividend was too high relative to earnings. So, focus 2030 is essentially about turning these strong market positions into better financial results. So this is a classic case when you basically have too much of a payout of dividends and you don't reinvest enough in your business.
(03:39) Now if you look at the segment EBITDA breakdown for the first half versus last year first half North America branded and rest of the world. So up 30% the company wholesale distribution business selling handmade cigars plus machine rolled cigars and smoking tobacco across North America and international markets.
(03:56) Profit growth was driven by better US handmade cigar market, market share gains and favorable pricing mix with significant additional boost from US tariff refunds. So, we'll see how sustainable those will be. Europe branded so 16% drop year-over-year mainly European machine cigars and smoking tobacco alongside nicotine pouches like XQS.
(04:22) The key European markets declined about 4%. The company lost share in France following a product quality issue and lower production volumes hurt margins. An obsolete inventory write down reduced first half EBITDA margin by roughly 2 and a half% in itself. So this is very questionable. Now North America online and retail up close to 10%.
(04:44) The company direct to consumer business selling mainly handmade cigars through websites, contact centers and physical cigar stores. Growth came from improving handmade cigar market, new store openings and retail market share gains while margins also benefited from tariff refunds and improving underlying commercial execution.
(05:03) So we'll see how this grows going forward. So far this is good growth but questionable with the oneoff item and this seems to be decent with this more questionable negative. Now here you can see the company's balance sheet debt when we talk about debt and debt to equity in a company with high amounts of intangible assets goodwill debt to equity is a less meaningful metric but here you can clearly see the jump in total debt over the years and debt to equity interest coverage ratio is still five but if you
(05:38) think about the company what they use is the leverage ratio which is net interest bearing debt to long-term EBITDA before special items and that was three times. Company wants to reduce that to 2.5 times. Now if you think about ratings well in plain English Moody's is saying that these guys have a decent basically these guys make good money selling cigars and pipe tobacco across 100 countries.
(06:06) They pay their debts on time and their financial outlook is relatively stable. They aren't a high-flying tech stock but they are solid low risk business. Because of this there is high trust. So you can still see them in investment grade when the group issued 3 million euros of bond back in 24th September.
(06:30) Moody's gave it the same solid rating. So this is the investment grade. And I looked at on interactive brokers I could found their debt. You can see this is close to 5% was at issuance. So 4.875% late 24 in September and today they are trading above par around 4.3% yield in euros. So that's not bad.
(06:56) That's an investment grade bond. Now look at this. So first top chart you can see free cash flow has been under pressure with the decline in their core markets. 25 with some one-off items with 26 expected to be 950 to 1200 million in line with company guidance for 2026 and keep in mind the management would use much of this cash flow to reduce the debt going forward.
(07:25) And of course you can also see how dividend was basically relatively high versus the free cash flow in 25 even more than the free cash flow itself. And now you have a much lower payout ratio. The company is guiding 40 to 60% against adjusted earnings per share. So adjusted EPS is going to be 9 to 11. If you look at on per share numbers, you can see actually much better results because the company, if I jump back here, you can see they bought back 21% of shares since 2019.
(07:57) So share buybacks increased the company's outlook. So you can see that free cash flow per share on a midpoint target based on this is not looking bad. So it's close to the peaks in 2021. And if I think about their 40 to 60% payout ratio against adjusted EPS that is 360 to 660. So a midpoint is 510 which is close to a 7% yield.
(08:25) So this is still a high dividend payer. Now if you think about the company's profitability over the years, I'm using free cash flow as my baseline 26 was kind of an outlier. So we can let's say write it off but that was a weaker year but you can see that return on tangible assets which is total assets minus intangibles.
(08:44) That's the core metric you should use return investment return on tangibles. I think that's what you should use going forward and I'm using everything based on free cash flow on the top chart. So this is what I calculated. So you can see that the return on tangible assets have been dropping with return investment but still somewhat okay, somewhat decent.
(09:06) And if you look at the company calculated return on capital where they use of course not free cash flow, it's still somewhat okayish 8.3 in 2025. So that's closer to my ROTA calculation based on my free cash flow model. But the company is aiming to improve that to 11% plus. So that's of course very positive and they are looking at EBIT margins in 2026.
(09:32) So this is their 26 guidance 13 to 14 and a half% which is not a bad margin. It lags the great tobacco players. So it's much lower than for an Altria for the top dogs are from profitability standpoint are Altria British American Tobacco and Philip Morris with 40 50% return on tangible assets.
(09:56) So they have massive profitability. Then you have Imperial Brands with let's say 25 26 27% return on tangible assets followed by this company which is of course not selling cigarettes. It's selling cigars, pipe tobacco, nicotine pouches. So, it's a bit different of a business. Now, financial ambition is really about improving profitability and turning that into stronger cash flows.
(10:22) So, by 2030, management targets low singledigit compounded annual growth rate in EBIT while improving returns on invested capital above 11%. So, this is really about that. Now most importantly for valuation which we'll do they want free cash flow to be above by 2030 1.2 billion Danish croner. For 26 the guidance is already 950 to 1.
(10:50) 2 billion Danish krona. So the strategy is less about explosive growth and more about gradually improving margins profitability and cash generation throughout the years after paying down the debt to let's say two and a half times leverage ratio. then still keeping the 40 60% dividend payout but above that to do more meaningful buybacks.
(11:13) Now the company oh I just explained what was the next slide. So the company is also resetting the capital allocation framework. So the dividend will now be 40 to 60% payout from the previous dividend which was cut by close to 50% rather than maintaining this unsustainable dividend. I think that's a big plus. It's a hard thing to do.
(11:33) The market will punish you if you do that but you have to do that to keep the business alive. The remaining cash can fund the focus 2030 investments share buybacks while keeping leverage at or below 2.5 leverage ratio and protect the investment grade credit rating. So shareholders return remains important but with much more financial flexibility between dividends and buybacks.
(11:54) You can see historical payout ratios. The company will now cap it at 60%. So we are looking at oh here it is 40 60 and I really like this. So if I would have looked at the company a year or two ago I would be like oh they are paying out too much. So actually that's one of the criticism I have for Altria was that they have an 80% payout ratio.
(12:18) Even Philip Morris has a very high payout ratio relative to the free cash flow. So I'm thinking free cash flow. I like this. So that is going to be much better from a free cash flow payout ratio. So this is 40 60%. We'll see this leaves them room to reinvest in the business. Keep the dividend flowing and do buybacks.
(12:42) So this is I think what they should do. They should fix this reinvest in the business. Everything is in line. Keep the lower end of this payout and just focus on dividends. That would be my preference for the company. Now if you think about valuation I use a 10% discount rate. Free cash flow growth is anchored at 2026 full-year guidance for the bear base and bull case.
(13:04) So it's 950 here right that's the bottom of the guidance, 1075 is the midpoint of the guidance and 1200 free cash 26 that's for the bull case. So this management 26 guidance and the focus 2030 strategy which and I target a conservative zero to one. So basically what you see here you have these growth rate assumptions.
(13:34) So this is not too huge of a growth perpetual growth beyond 2033. I'm using very modest numbers which is probably good to be more conservative. I don't think this could be extremely modest if you think about the company could not just grow the business but also have perpetual growth fueled by buybacks on a per share basis but let's just say conservative shares outstanding to be reduced by 5 10 and 15%.
(14:07) If you remember since 2019 through 26 first half you've seen 21% share reduction. So that is same period seven yearsish and you've seen much more than my model share buybacks because I think the company would first fix the balance sheet before doing buybacks and with that you have three scenarios basically bear case is still up 77% up 130 190%.
(14:30) So there seems to be massive margin of safety for the company even if you think about the bear case scenario, right? So they only buy back 5% of the shares. Growth is extremely weak from the relatively weak starting point. So 950 and then you put only half a percent growth and no growth beyond 2033. Some buybacks but like a fourth what they did the past seven years and you still end up with the 77% upside.
(14:55) So I think this is a very good bet from that perspective. of course depends on management. So let's summarize first operational so strong market position. So they are leader in US handmade and European machine rolled cigars. Nicotine pouches offer the main new growth opportunity for the company.
(15:12) But if you look at every tobacco company, everybody wants to do nicotine pouches. So we'll see how they can manage that execution recovering. So the ERP disruption hurt very much 25. US cigar businesses are improving while Europe remains a weak spot and the company is still a Danish company and has some core markets in Europe. Focus 2030.
(15:36) So stabilize legacy tobacco, grow US handmade cigars and scale the nicotine pouch business. So that's your operational goals. Financials deleveraging and payout. So leverage is now three times leverage ratio they want to have it two and a half or below. and the new sustainable 40 to 60% of adjusted EPS earnings per share dividend payout with more room for buybacks.
(16:01) So I'm a fan here. So maybe I could also give here a green one for that 2030 target. So what they aim at is better profitability, 11% return invested capital, low singledigit earnings before interest and tax growth annually and by 2030 the 1.2 billion Danish croner free cash flow plus a year.
(16:27) And then if you look at the 2026 guidance, they are looking at 950 million to 1.2 billion free cash flow. We will see how that turns out. The first half wasn't that bad at all. And if you think about company tobacco businesses and consumer businesses, the first half usually understates free cash flow potential.
(16:46) The second half usually has much more catch-ups to do. So it's not 50/50 on the free cash flow allocation, let's put it that way. Now, they have solid finances. So, they have an investment grade Baa3 rating from Moody's five times interest coverage ratio so far in the first half. And the full-year 26 dividend potential is roughly 360 or 660 per share, which is at the midpoint, and I'm going to just pick the midpoint is 510 per share, which is roughly 7%.
(17:18) So that's a pretty solid dividend with that is 50% payout of the midpoint of the guidance. Now valuation. So all three scenario looks extremely attractive, right? So I think this is why you watch this channel to find gems like this company with asymmetric risk-reward profiles.
(17:42) Now 26 expected free cash flow yield. So I'm going to use when I'm in this bullet point I'm thinking midpoint of guidance. So that is 18% free cash flow with a 7% dividend yield. And what's the thesis? So cheap if execution delivers significant upside on free cash flow assumptions which are I think are very conservative relative to my growth rate assumptions with further potential from buybacks after the deleveraging and higher than expected growth.
(18:11) So I tried to be really really conservative with this name. Still I rely on management guidance and in the past they underdelivered. So my conservative growth assumptions I think are useful to protect somewhat against that. Now if you look at the stock it's basically on top of the list because these other companies have much different risk profiles but I think if you're thinking about a risk-reward story this could be number one.
(18:40) Of course, the company has to still deliver on guidance. And I'm somewhat biased because, my father used to smoke Cohiba and he really liked it. That was the only cigar I ever smoked. So maybe I'm going to buy some and help the business grow. So, that said, let me know what you guys think.
(19:04) If you found this video helpful, please consider liking and subscribing and checking out the membership. And with that, I'll see you in the next one. Take care.