Release Date: 10 July 2019

Turning Point Brands

CBD and two Zig-Zags. Baby, that’s all we need.

Ticker: TPB.NYSE • TPB is the company behind Zig-Zag rolling

papers. It’s a highly profitable, but woefully
Market Cap: US$1 billion under-covered and under-valued company.
• The market is unaware that TPB is positioned
Recent Price: US$52.04
to become one of the biggest CBD companies,
Target Price: US$121.77 with a network of 1.5M online customers and
155K stores. By contrast, the largest CBD pure-
Expected Return: 134% play is Charlotte’s Web, which has its products
in only 6K stores, but is valued at US$1.8B.
Opinion: Conviction Buy • TPB is covered by only two analysts. As its CBD
story gains awareness, we expect substantial
market interest. Investors are thirsty for an
established, profitable, and non-speculative
company in the cannabis space. TPB is it.

You should have expected us

aainfo@neomailbox.ch
Twitter: @anonanalytics
www.anonanalytics.com
 Disclaimer
Neither Anonymous Analytics nor its principals is a registered investment advisor or otherwise licensed in any jurisdiction,
and the opinions expressed herein should not be construed as investment advice. This report expresses our opinions,
which we have based upon publicly available facts and evidence collected and analyzed including our understanding of
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Don’t be stupid and invest in the public markets unless you are prepared to do your own homework and due diligence.

1
 Overview
Turning Point Brands (“TPB”) is an obscure US$1 billion NYSE-listed company that operates in the Other
Tobacco Products (“OTP”) market. The Company does not sell cigarettes, but instead sells periphery
products including rolling papers, chewing tobacco, and vapes. While the cigarette industry has
experienced generational declines with smoking falling out of favor, the OTP market has continued to
grow.1

You’ve probably never heard of Turning Point Brands. But you’ve definitely heard of Zig-Zag rolling papers.
That’s TPB:

What’s even more unknown is that TPB recently launched its own brand of CBD products and is positioned
to become one of the biggest CBD companies in the next two years. That’s not wishful thinking – thanks
to its OTP business, TPB already has an established distribution infrastructure that includes an
e-commerce platform with 1.5 million unique customers, and a sales force with access to over 155,000
retail stores in North America, including 15 of the top 25 convenience store chains.2

Most cannabis companies trading at nosebleed valuations are loss-making start-ups that are still trying to
build out their distribution infrastructure and compliance. TPB already has the distribution, has a
profitable core business with a proven management team, and has the regulatory background. If TPB
traded at even a fraction of the valuation of other cannabis names, the stock would double overnight.

1
https://www.sec.gov/Archives/edgar/data/1290677/000114036119004508/h10061332x1_10k.htm#tI1 pg. 4
2
https://seekingalpha.com/article/4260182-turning-point-brands-inc-tpb-ceo-larry-wexler-q1-2019-results-
earnings-call-transcript

2
 TPB and the CBD Market
This year, TPB established Nu-X Ventures, a wholly-owned subsidiary dedicated to the development,
production, and sale of alternative products.3 Nu-X’s first two launches are its self-branded CBD products
and its own proprietary vaping kit.

Nu-X CBD

TPB already has an established distribution network that should be the envy of every cannabis company.
By leveraging its online e-commerce infrastructure, as well as its relationships with independent retail
stores and national chains, we expect TPB to become one of the most prominent CBD companies in North
America by 2021.

So, how do we get there?

On 1 March 2019, TPB launched the Nu-X website and started selling self-branded CBD oils, e-liquids, and
concentrates:

Source: https://www.nu-x.com/shop

3
https://www.turningpointbrands.com/investor-relations/news-releases/2019/01-15-2019-133158625

3
Following initial testing of products on its stand-alone Nu-X website, TPB began rolling out CBD products
on its primary online platforms in Q2 2019, including vaporfi.com and directvapor.com. TPB has built out
its e-commerce platform over the last three years through the acquisition of several vape companies with
substantial online presence. Today, the online B2C platform reaches 1.5 million unique customers looking
for vaping products. The customer base that vapes is “extremely similar” to the customer base that is
interested in CBD, according to Management.

Source: https://www.vaporfi.com/

Source: https://www.directvapor.com/

4
Of course, vape bros are only a small subset of the total addressable market. Once TPB gathers enough
sales analytics from its own platforms, the Company plans to place its best-selling CBD products into its
network of independent and national chain stores that number 155,000 locations, including
Circle K, Dollar General, and Rite Aid:

Source: 1 May 2019 Corporate presentation, slide 7

CBD is gaining mainstream recognition, and interest is rapidly growing among the general population in
its purported therapeutic effects, including for the treatment of ailments like insomnia, inflammation, and
anxiety. The stigma around marijuana is fading with legalization, and a whole crop of grandparents,
white-shoe lawyers, and stuffy accountants are looking to CBD as an alternative to prescription drugs. This
is probably not the audience that is going to go on www.directvapor.com to buy CBD products, but they
probably will go to national chain stores like Rite Aid, which adds an air of legitimacy to their purchase.

At the same time, not every CBD supplier can get their product into these chains. National chain stores
have reputation, sourcing reliability, and quality assurance issues to consider. They are not keen on
entering the CBD space with obscure start-ups with no prior relationships, particularly because of the
regulatory environment around packaging, dosing, and compliance. But those 155,000 independent and
chain stores that already have a partnership with TPB through Zig-Zag and other tobacco products will
certainly be much more willing to take on TPB as a CBD supplier.

In addition to having the distribution relationship that most CBD and cannabis companies lack, TPB also
has a deep understanding of lab testing and proper dosing, given its background in the tobacco space.
One of the biggest issues facing the nascent CBD market is that it's littered with new companies offering
inconsistent products and dosage. We expect at some point for the FDA to bring in regulation around CBD,
and many of the smaller companies that don’t have regulatory experience will disappear.

5
By contrast, TPB is a professional company with extensive experience in dealing with FDA regulations and
guidelines. In fact, each of its Nu-X CBD products come with a certificate of analysis from an accredited
lab that provides information on compound profile and potency. This is the kind of professionalism and
compliance protocol national chains want to see:

Source: Lab analysis for Cirrus CBD e-liquid

To further illustrate how serious TPB is about entering the CBD market, the Company recently asked its
traditional tobacco farmers to start growing hemp,4 and last month was awarded a Processor/Handler
license from the Department of Agriculture in its home state of Kentucky.5

4
Q1 2019 conference call
5
https://www.businesswire.com/news/home/20190626005465/en/

6
CBD Revenue Potential

The potential for TPB here is huge and we believe the Company has the distribution infrastructure already
in place to make CBD products a substantial part of its revenue mix. Many cannabis start-ups that are
trading at astronomical multiples can only dream of having the same distribution network and compliance
background as TPB.

Let’s talk numbers.

In the first quarter of 2019, the Company generated US$800,000 from Nu-X products:

“So, the first quarter for Nu-X was a small step in a big journey that offers tremendous
opportunity for thoughtful marketers and brand builders. In the quarter, we sold
US$800,000 of Nu-X products and expect the sales rate to grow exponentially as we move
forward in the year.”
- Q1 2019 conference call

This is pretty impressive revenue, considering the Nu-X products were soft-launched in Q1 and had no
previous brand recognition. For full-year 2019, TPB expects Nu-X products to contribute between
US$10 million to US$20 million in revenue, 6 most of which we expect to come from CBD sales. 7 That
represents approximately 4% of the Company’s 2019 revenue guidance of US$380 million to
US$405 million. From there, we expect CBD sales to grow exponentially in 2020 and 2021.

The CBD market was worth US$1 billion in 2018 and is estimated to reach US$16 billion by 2026.8 That’s
a compounded annual growth rate of 41%. How accurate these forecasts are is anyone’s guess, but we
believe this estimate is supported by the fact that Google search interest in “CBD” has grown 100% in the
last 12 months, and 500% in the last two years:

6
https://seekingalpha.com/article/4260182-turning-point-brands-inc-tpb-ceo-larry-wexler-q1-2019-results-
earnings-call-transcript
7
Nu-X products include both Nu-X CBD and the RipTide vaping kits. We believe the RipTide kits will replace all
revenue from V2 e-cigarette sales (US$8 million in 2018) which the company lost distribution rights to last year
(more on this later), which means most of the US$10-20 million revenue guidance will be CBD sales.
8
https://www.globenewswire.com/news-release/2019/05/06/1817668/0/en/Cannabidiol-CBD-Market-To-Reach-
USD-16-32-Billion-By-2026-Reports-And-Data.html

7
Source: Google Trends

Although the CBD market’s projected growth is impressive, we actually expect TPB’s CBD business to far
outpace this growth because of its already established distribution network.

For example, Charlotte’s Web (CWEB.TSE) and CV Sciences (CVSI.OTC), two relevant-sized CBD pure-play
companies, have both quadrupled their revenue over the last three years, and analysts expect them to
triple and quintuple revenue over the next two years, respectively:

Revenue Growth of CBD Pure Plays (US$ 000s)

Name 2016 2017 2018 2019E 2020E
CV Sciences 11,060 20,679 48,244 80,020 120,350
Charlotte's Web 11,113 30,827 53,598 102,862 260,657
Source: Company filings, analyst estimates, our analysis.

Notably, both these companies have to build out their retail presence as they go. By contrast, TPB already
has its retail relationships established nationally. If these two companies – which have to establish a new
relationship for every store they enter – can grow their revenue by leaps and bounds, then what does that
mean for TPB’s CBD potential if TPB simply needs to leverage the vast retail network it already has?

8
So, what exactly is the revenue potential here?

The closest publicly-traded comparable we could find is Charlotte’s Web, a US$1.8 billion market cap,
Toronto-listed CBD pure-play that sells products both online, and through a strong brick-and-mortar
distribution network. In fiscal 2019, analysts estimate that CWEB will generate revenue of
CAD$137 million – let’s call it an even US$100 million. CWEB generates approximately half its revenue
online, and the other half comes from wholesalers and a variety of brick and mortar retailers.9

We’ll start by comparing CWEB’s online reach with TPB. CWEB’s e-commerce sales are primarily through
its own website. According to SimilarWeb statistics, CWEB’s retail website www.charlottesweb.com gets
about 465 thousand visitors a month. By contrast, TPB’s two main B2C e-commerce platforms,
www.vaporfi.com and www.directvapor.com together get over 1.8 million visitors a month, representing
approximately 4x as much traffic.

TPB has the audience reach and e-commerce engine to outsell CWEB online. But online sales are only
secondary for TPB. Management has made it abundantly clear that the end goal is not just to sell CBD
online, but to go mainstream in traditional stores:

“Our back half of the year [2019] plan includes the launch of products that will round out
our CBD portfolio with, in particular, emphasis on products that will be widely available in
our traditional sales channel.”
- Q4 2018 conference call

“I’m really happy that we sell US$100 tincture bottles that have very good margins [on
our websites], but that’s not the future of – that’s a small business for us versus how do
you have a Turning Point Nu-X CBD product in 150,000 or 200,000 Zig-Zag stores.”

- Q1 2019 conference call

“… our traditional retail sales force is exceptionally effective. We expect the sales force
[to] provide a meaningful differentiation as compared to our competitors in the place of
not only RipTide but also mainstream CBD distribution.”

- Q1 2019 conference call

9
https://s22.q4cdn.com/636117063/files/doc_financials/2019/Q1/CW-Q1-2019-MD-A.pdf pg. 5

9
The real engine of TPB’s CBD ambitions will be its brick-and-mortar retail network. For example, according
to CWEB’s IR website, its products are available in 6,000 retail locations:

Charlotte’s Web

By contrast, TPB has a network of 155,000 traditional retail stores, or 25x that of CWEB. For our analysis,
we won’t assume that TPB can put CBD into all those retail stores, because we find blue-sky scenarios in
research reports obnoxiously optimistic.

And more to the point, it’s highly unlikely that every one of those 155,000 stores that sells Zig-Zags is also
going to want to sell CBD, either because they are in a jurisdiction where the laws are unclear,10 or just to
be conservative, or a myriad of other reasons. Who knows?

But we think it’s reasonable – if not entirely conservative – to assume that if TPB is looking to introduce
its CBD products to its retail network in the back half of 2019, then by 2021 the Company can match CWEB
by selling in at least 6,000 of its stores, which represents less than 4% of its retail base. Assuming the same
online/off revenue mix, and per store sales figure as CWEB, that means TPB could generate US$100 million
of revenue in 2021 from self-branded CBD products. US$100 million in CBD sales would represent 20% of
TPB’s revenue mix by the end of 2021, by our estimates.

All in, we are assuming that TPB generates the same amount of CBD sales in 2021 that CWEB is expected
to generate this year, despite having 4x the online traffic and 25x the retail base. To be more conservative,
we are assuming no same-store organic growth between now and 2021. Frankly, nothing in our analysis
is incredibly outlandish or so demanding as to be unlikely. Yet, for all this, CWEB trades as a US$1.8 billion
company, while TPB is valued at US$1 billion based purely on its current OTP business.

10
https://www.nytimes.com/2019/05/06/us/cbd-cannabis-marijuana-hemp.html

10
Once the market understands this story, we expect TPB’s CBD business to be valued by at least as much
CWEB is today, if not more. CWEB needs to build every retail relationship it has, whereas once TPB
penetrates 4% of its retail base, it will still have additional opportunities for the remaining 96% of its
network. Even if we cut CWEB’s current US$1.8 billion valuation by about half and value the entire
company at US$1 billion, that still means TPB’s share price will potentially be worth double as it ramps up
its CBD business.

Why Does This Opportunity Exist?

You: Great, TPB has entered the CBD space and it’s going to double its share price. But why does this
investment opportunity exist, and why has the market missed it?

Us: TPB is an extremely under-covered name that is not on the radar of the invest community. The most
recent Seeking Alpha article on TPB was published in December 2018, before the Company even launched
its CBD business. Furthermore, TPB is currently only covered by Cowen and B. Riley FBR. One is a
second-tier broker, and the other is a shop we’ve never heard of with less than 300 twitter followers.

By contrast, Bloomberg data shows that cannabis companies of comparable market size are covered by
an average of nine brokers each, including prominent firms like BAML and RBC Securities:

Cannabis Company Coverage

Name Market Cap (US$ M) Analyst Coverage
Charlotte's Web Holdings Inc 1,950 6
Trulieve Cannabis Corp 1,240 5
Organigram Holdings Inc 1,020 11
MedMen Enterprises Inc-CLB 1,300 6
Hexo Corp 1,335 16
Green Organic Dutchman 710 5
CannTrust Holdings Inc 698 13
Turning Point Brands 1,000 2
Source: Bloomberg

As TPB’s CBD story gains traction, we expect substantially more coverage from Wall Street, and far more
interest from investors. Most cannabis companies with broad sell-side coverage are still highly speculative
and loss-making. We believe investors are thirsty for a company in the cannabis space that is exceptionally
profitable, well established, and has a history of delivering results. TPB is that company.

11
 Oh Yeah – TPB Has Other Stuff, Too
While the focus of this report is the CBD potential, it’s important to recognize that TPB is already a very
successful, profitable, and growing business in the OTP space. In fact, the Company’s growth and
execution is a case study on Management’s ability to build brands and effectively distribute products.

TPB operates three lines of business, namely Smokeless segment, Smoking segment, and NewGen
segment. The Smokeless segment consists primarily of Stoker’s brand chew tobacco and moist snuff. The
Smoking segment consists of Zig-Zag papers and cones. These two segments are TPB’s core business that
continue to grow and spit out cash. The NewGen segment manufactures and distributes e-cigarettes,
e-liquids, and vaporizers, led by the Vapor Beast brand:

The Smokeless and Smoke segments have traditionally been the primary revenue generator of the
Company. But in 2017 and 2018, TPB made a series of acquisitions aimed at considerably expanding the
scope and reach of its vaping business. Accordingly, the NewGen segment has exploded over the last two
years, and in the most recent quarter, accounted for nearly 50% of revenue:

Revenue Mix (US$ 000s)

140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
2014 2015 2016 2017 2018 Q1 2018 Q1 2019

Smokeless products Smoking products NewGen products

Source: Company filings, our analysis

12
 NewGen
Prior to 2017, TPB’s revenue from vaping products was minimal and accounted for less than 10% of sales.
Most of these sales were through traditional wholesalers using the same salesforce TPB relies on for the
distribution of its Smoke and Smokeless products. Following a series of acquisitions in 2016, 2017, and
2018, TPB positioned the NewGen segment as the new growth driver of the Company, and in the process
established an e-commerce platform with a focus on selling directly to retailers and end-costumers.

Specifically, TPB acquired four vape companies with strong online presence that collectively supply
thousands of independent vaping shops, which TPB previously did not have relations with. These
acquisitions are the backbone of TPB’s NewGen segment. This is also the online distribution engine that
TPB is using to sell and receive feedback on its CBD products, before introducing them to its traditional
independent and national chain stores.

Here is a quick review of the four acquisitions:

Date Name Consideration Valuation price Platforms Details

Operates B2B e-commerce

0.5x revenue
30-Nov-16 VaporBeast US$27 million vaporbeast.com platform and distributes to
4x EBITDA
4,000 indy vape shops

Miami-based manufacturer
34 self-branded
0.4x revenue and marketer of proprietary
30-Jun-17 VaporShark US$4 million corporate and
5x earnings vaping products to 1,000
franchised retail stores
indy vape shops
Operates B2B e-commerce
platform, and manufactures
0.15x revenue
30-Apr-18 VaporSupply US$4.8 million vaporsupply.com and distributes vaping
0.8x gross profit
products to 1,400 indy vape
shops
Operates large B2C e-
International vaporfi.com
0.5 revenue commerce platform with
6-Sep-18 Vapor US$24 million southbeachsmoke.com
4.9x EBITDA 1.5 million unique
Supply (IVG) directvapor.com
customers
Source: Company filings, our analysis

A recurring theme with TPB’s acquisitions is that they are purchased at incredibly favorable multiples and
are immediately accreditive. Many smaller, but otherwise successful vaping companies do not have the
compliance in place to deal with the evolving FDA regulatory environment and are eager to get scooped
up. TPB can go in, buy smaller operators for cheap, and build on their already established platform with
in-house expertise in marketing analytics and FDA compliance. This creates substantial efficiencies and
cross-selling opportunities. It’s regulatory arbitrage at its finest.

13
RipStick

As part of the Company’s expansion into the vaping business, TPB designed and developed its own
proprietary pod-based vapor system called RipTide (featuring the RipStick vape pen). This product was
launched in Q1 2019 under the Nu-X umbrella:

Source: The Internets

Until recently, TPB was the exclusive distributor of V2 e-cigarettes in the US. In October 2018, VMR
Products LLC, the supplier of the V2 e-cigarette, was acquired by Juul for US$75 million, and the
distribution agreement with TPB was subsequently terminated. 11 V2 e-cigarette accounted for
approximately US$8 million of TPB sales in 2018.12

TPB launched the RipStick on its online properties in Q1, and is now accelerating the rollout to its
brick-and-mortar locations. Based on Management commentary, we expect the RipStick will replace lost
sales from the V2 e-cigarette. We also believe that RipStick will have higher margins than the V2
e-cigarette because it’s an internally manufactured product.

11
https://www.sec.gov/Archives/edgar/data/1290677/000114036119004508/h10061332x1_10k.htm pg. 39
12
https://www.sec.gov/Archives/edgar/data/1290677/000114036119004508/h10061332x1_10k.htm pg. 39

14
NewGen Margins

The four vape acquisitions helped TPB gain a distribution network that has propelled the NewGen
segment to account for nearly 50% of revenue from less than 10% in the span of two years. Moreover,
the acquisitions allowed TPB to expand from distributing primarily at wholesale, to distributing direct-to-
customers online, where the Company can capture incremental margins.

Since Q1 2017, NewGen gross margins have expanded from 24% to 34%, driven primarily by the IVG B2C
acquisition in late 2018:

NewGen Revenue and Gross Profit Margin Growth (US$000s)

50,000 40%
45,000 38%
40,000 36%
35,000 34%
30,000 32%
25,000 30%
20,000 28%
15,000 26%
10,000 24%
5,000 22%
- 20%
Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019

Revenue Gross margins Gross margins (%)

Source: Company filings, our analysis

In the short term, we believe NewGen margins will continue to expand through the year as the Company
integrates its recent acquisitions, consolidates production, and cuts costs. For example, in Q1, TPB shut
down its California facility and consolidated distribution in Kentucky, where UPS has their hub.

“Looking now at TPB infrastructure, by the end of the third quarter we expect to have
completed our vapor integration efforts thereby unleashing improved margins through
consolidation and efficiencies.”
- Q1 2019 conference call

15
 Smokeless/Smoke Segments
Finally, we come to TPB’s core Smokeless and Smoke segments. While not as sexy, these two segments
are the Company’s income engine and generate the vast majority of cash flow, which has helped TPB pay
down debt, initiate dividends, and expand into new products. More importantly, the growth of the core
business against much larger competitors is testament to Management’s ability to build out its CBD
business.

Smokeless Segment

Revenue from the Smokeless segment is derived from the sale of chew tobacco and moist snuff tobacco.
The segment is driven primarily by Stoker’s brand chew tobacco:

Source: Company presentation, 1 May 2019

TPB acquired the Stoker’s brand in 2003, and grew it to the number one discount and number two overall
chew tobacco brand.13 From 2014 to 2018, TPB grew its market share of Stoker’s chew tobacco from ~15%
to 19.2%. This growth in market share is considerable given that TPB competes in the chew tobacco space
against industry giants, including Altria and British American Tobacco.

In the process of taking market share, TPB grew its Smokeless segment revenue from US$71.5 million to
US$90 million, while maintain gross margins greater than 50%:

13
https://www.sec.gov/Archives/edgar/data/1290677/000114036119004508/h10061332x1_10k.htm pg. 8

16
Smokeless Segment Analysis
(US$ 000s) 2014 2015 2016 2017 2018
Revenue 71,465 74,293 77,913 84,560 90,031
Gross margins 53.1% 51.9% 49.8% 50.5% 51.6%
Gross profit 37,925 38,521 38,823 42,703 46,490
Stoker's Chew market share n/a 15.8% 16.8% 17.9% 19.2%
Source: Company filings, our analysis

While cigarette sales are declining, the smokeless market has continued to grow. Just last month, Altria
spent US$372 million to acquire an 80% stake in the nicotine pouch business of Swiss tobacco company
Burger Sohne, in a further bid to diversify away from cigarettes. 14 We believe this acquisition is tacit
acknowledgement by Altria that the smokeless market is where growth is.

Smoke Segment

Revenue from the Smoke segment is derived from rolling papers, cones, and cigar wraps under the
Zig-Zag brand. TPB licenses and sources the Zig-Zag brand from France-based Bolloré, and is the exclusive
distributor in the US and Canada:

Source: Company presentation, 1 May 2019

14
https://www.ft.com/content/7767b67e-860c-11e9-a028-86cea8523dc2

17
Between 2014 and 2016, Smoke segment revenue grew slightly and margins expanded considerably.
However, in 2017 and 2018 revenue growth stagnated as competitors introducing hemp and unbleached
rolling papers into the market. These new offerings resonate with marijuana smokers, who are becoming
an increasingly larger customer base of rolling papers as legalization sweeps through North America:

Smoke Segment Analysis

(US$ 000s) 2014 2015 2016 2017 2018
Revenue 108,799 105,898 111,005 109,956 111,507
Gross margins 44.7% 49.9% 51.9% 52.0% 51.2%
Gross profit 48,660 52,842 57,595 57,146 57,043
Zig-Zag papers market share n/a 32.7% 33.5% 32.9% 32.1%
Source: Company filings, our analysis

In 2018, TPB responded by introducing its own line of Zig-Zag organic hemp rolling papers, and more
recently launched unbleached papers and pre-rolled cones. All these products are already showing results,
and are expected to return the segment to revenue and market share growth in the second half of 2019:

“In the fourth quarter [of 2018], we further penetrated the retail universe with organic
hemp papers becoming the second largest hemp SKU in the category despite being the
market less than a year.”
- Q4 2018 conference call

“In [Q1 2019], we also expanded the new Zig-Zag cones and unbleached papers with
preliminary success and strong trade enthusiasm. Each of these segments have grown
robustly and we quickly found ourselves in a short stock position on the cones due to
stronger than anticipated demand… Our internal data suggest that our new Zig-Zag cones
could prove to trigger a meaningful shift in measured demand and category growth.”

- Q1 2019 conference call

18
 Debt Analysis
TPB is an asset-light business that outsources most of its manufacturing. In 2018, 85% of net sales were
derived from outsourced products.15 By outsourcing the manufacturing process, TPB can instead focus on
building relationships with retailers, branding, and consumer analytics, to quickly introduce new products.
Accordingly, the Company has a small balance sheet unencumbered by large annual capital expenditures
and property, plant, and equipment concerns.

The most notable line-item on TPB’s balance sheet is its debt. Despite TPB’s recent acquisitions and its
expansion into the CBD business, Management has maintained the integrity of its balance sheet and debt
levels. When TPB went public in 2016, it had US$300 million of net debt and was paying US$34 million in
interest. By 2018, net debt had been paid down to US$220 million, and interest expense was cut by more
than half:

Net Debt and Interest Expense Trends (US$ 000s)

350,000 35,000

300,000 30,000

250,000 25,000

200,000 20,000

150,000 15,000

100,000 10,000

50,000 5,000

- -
2014 2015 2016 2017 2018

Net debt (LHS) Interest expense (RHS)

Source: Company filings

This capital discipline has even allowed TPB to initiate token quarterly dividends. Looking forward, we
expect Management to continue to maintain a healthy balance sheet. Currently, net debt to adjusted
EBITDA stands at 3.4x, and Management has a stated long-term target of 2.5x to 3.5x.16

15
https://www.sec.gov/Archives/edgar/data/1290677/000114036119004508/h10061332x1_10k.htm#tI1 pg. 8
16
https://seekingalpha.com/article/4246561-turning-point-brands-tpb-ceo-larry-wexler-q4-2018-results-earnings-
call-transcript?part=single

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 Valuation
We value TPB as the sum of its three distinct businesses, namely the core Smoke/Smokeless business,
the NewGen vaping business, and the emerging CBD business.

Valuing the Smoke/Smokeless Business

We think the best comparable to TPB’s Smoke/Smokeless business is Altria, since both operate in related
markets, with a US-centric focus. Moreover, both companies have very similar margin profiles:

Altria vs TPB Metrics (US$ 000s)

Altria 2016 2017 2018
Revenue 25,744,000 25,576,000 25,364,000
Gross profit margin 45.0% 46.8% 48.3%
Operating income margin 34.0% 37.5% 35.9%

TPB Smoke/Smokeless 2016 2017 2018

Revenue 188,918 194,516 201,538
Gross profit margin 50.9% 51.3% 51.4%
Operating income margin 36.4% 36.9% 35.5%
Source: company filings, our analysis

The most obvious difference between Altria and TPB’s Smoke/Smokeless business is that TPB has been
growing. In 2018, the Smoke and Smokeless segments generated combined revenue of US$202 million,
up 3.6% from the previous year. By contrast, Altria’s revenue has been flat for years.

Looking ahead, we see multiple vectors of growth for TPB’s Smoke and Smokeless segments, given the
recent introduction of organic hemp Zig-Zags and pre-rolled cones in 2019, and continued growth in
Stoker’s chew tobacco market share, as well as the overall OTP market. We can’t say the same for Altria,
for which we expect flat revenue even in the best-case scenario, given cigarette volume trends in North
America.

Altria trades at 4.7x 2019 revenue estimates. Although TPB has guided 2019 total company revenue
growth of 13.5%, let’s assume TPB doesn’t actually grow this year. If we apply a 4.7 multiple on TPB’s
Smoke and Smokeless 2018 revenue of US$202 million, that would value the business at US$949 million.
That’s effectively TPB’s entire market cap currently.

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Valuing the NewGen business

Considering that TPB was the exclusive US distributor of VMR e-cigarettes until this year, and VMR just
got bought out in a recent transaction, we think it makes sense to value the NewGen business (excluding
Nu-X CBD) relative to the buyout value of VMR by Juul.

VMR is a private company so it doesn’t disclose financials. Luckily for us, it was majority owned by our old
friends at Huabao International (0336:HK), a Hong Kong-listed company. According to Huabao’s
disclosures, VMR was a mess. It reported revenue of RMB221 million (US$32 million) for the year ending
31 March 2018, down from RMB261 million (US$38 million) the previous year. It was also bleeding losses:

Source: https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0705/ltn201807051082.pdf pg. 205

Based on these financials, VMR’s price tag of US$75 million translates to an acquisition price of 2.3x
revenue.

By contrast, TPB’s NewGen segment is growing, has healthy gross margins, and in 2017 and 2018
generated positive operating income. In Q1 2019, the NewGen segment reported revenue of
US$42.8 million.17 Let’s assume no further growth and annualize that figure to get annual revenue of
US$171 million. At 2.3x revenue, the NewGen segment would be valued at US$393 million.

17
The segment actually reported revenue of US$43.6 million, but we subtract Q1 Nu-X revenue of US$800K.

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Valuing the Nu-X CBD business

Based on our valuation, TPB’s Smokeless, Smoke, and NewGen business are worth US$1.34 billion using
some pretty conservative metrics, and assuming no growth. Meanwhile, the entire market cap of TPB is
US$1 billion, representing 34% potential upside just on the current business alone.

Then there is the CBD kicker.

As we explored on page 10, we believe TPB’s CBD business can realistically be as big as Charlotte’s Web
by 2021. CWEB currently has a market value of US$1.8 billion. Apply whatever discount you want to that,
but even cutting that valuation by nearly half would value TPB’s CBD business at US$1 billion by 2021.

In our worst-case scenario, where we assume no further growth for TPB, and the CBD business goes
nowhere, the Company still has 36% upside potential when compared to peers.

In our base-case scenario, where we assume the CBD business is equally successful to CWEB and apply a
45% discount to that valuation, TPB has 134% upside potential when compared to peers:

Valuation (US$ 000s)

Worst-case
Smoke and Smokeless 949
NewGen 393
TPB implied value 1,342
Upside from current price 34%

Base case (+ CBD business)

CBD business @ 45% discount 1,000
TPB implied value 2,342
Upside from current price 134%
Source: Company filings, our analysis

We aren’t going to bother with a best-case scenario because if you don’t find a potential 134% return
based on conservative assumptions enticing enough, please email us directly at aainfo@neomailbox.ch
and let us know what better investments are out there – we too want to live that models and bottles
lifestyle.

To reiterate, with shares currently trading at US$52.04, our analysis suggests potential upside of 134%,
which represents fair market value of US$121.77 per share.

Opinion: CONVICTION BUY

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