Supreme (SUP:127p), a consumer goods manufacturer (B&M, Home Bargains and Poundland are all customers), has posted record half-year results and upgraded profit guidance for the third time since April.

Two-thirds (£26.4mn) of the 63 per cent rise in first-half revenue (£105mn) came from the major distribution agreement with the UK’s leading vaping brands, Elfbar and Lost Mary, which was announced in July. Supreme is supplying their vape products to some of the UK’s largest retailers, including Tesco, Morrisons, One Stop and WHSmith Travel. The group’s vaping business, which owns market leader 88vape, continues to fire on all cylinders, too, delivering 32 per cent higher revenue of £42.1mn (excluding the Elfbar revenue) and on an improved profit margin. Management has been proactive in implementing measures to prevent underage vaping, thus creating a viable blueprint for the industry to follow if, as expected, the UK government announces new e-cigarette regulations in the coming weeks.

Importantly, the group reported strong organic revenue growth in consumer lighting (up 21 per cent to £7.5mn), which had previously been impacted by customer overstocking, and its sports nutrition and wellness business (up 17 per cent to £8.9mn). Inflationary pressures in whey protein – a staple ingredient for fitness supplements – have been subsiding, which has improved the category’s margins, and manufacturing of the protein powders has been brought in-house to improve efficiencies.

The strong trading momentum has been maintained into the second half, so much so that full-year revenue guidance has been raised by 7 per cent to £210mn-£225mn and the board has upgraded cash profit guidance by 14 per cent to £32mn-£35mn, up from £156mn and £19.4mn, respectively, in the 2022-23 financial year. On this basis, analysts at Equity Development expect full-year pre-tax profit to increase 77 per cent to £27.2mn to deliver adjusted earnings per share (EPS) of 17.4p. Zeus Capital and Shore Capital have similar earnings forecasts, which imply the shares are rated on a modest price/earnings (PE) ratio of 7.2. They also offer a prospective dividend yield of 3.5 per cent.

The rating is not only out of sync with the ongoing operational outperformance, but it ignores the fact that the well-funded group has modest net debt (excluding IFRS16 leases) of £4.8mn. Or put it another way, Supreme’s enterprise valuation of £154mn equates to a miserly 4.5 times forecast cash profit. A rating materially higher is clearly warranted, hence why analysts at both PMH Capital and Equity Development have raised their fair value to 225p (from 200p) and Zeus Capital has initiated coverage with a discounted cash-flow-derived share price target of 189p.

So, having last rated shares in this lowly rated recovery play a buy, at 117p, in early July, I see potential for a material narrowing of the share price discount to analysts’ fair valuations. Buy.

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.