Equity research Zinzino: Robust profit growth despite lower gross margin in Q2 2024

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Zinzino continues to experience robust growth in Q2 2024, with a 24% revenue increase and a 29% rise in earnings per share. This growth in EPS occurred despite a decrease in gross margin year-over-year. North America is emerging as a key growth driver and may soon lead the company’s expansion. 

North America could be the next Central Europe

Central Europe was a key driver of growth in Q2 2024, contributing to a 24.3% increase in total group revenue, which reached SEK 507m. As growth in Central Europe begins to decelerate, we anticipate North America will take on a more prominent role. In the past quarter, North American revenue surged 136% year-on-year, climbing from SEK 20m to SEK 46m. If the letter of intent to acquire Zurvita in the U.S. is realised, North America could become the primary growth driver in the medium term. The potential acquisition of Zurvita is also a positive catalyst for the stock, as the expanded distributor network in the large North American market is held to enhance growth prospects significantly.

Despite a challenging comparison with Q2 2023, which led to a two percentage point decline in the gross margin to 34.4%, strong growth pushed EBITDA up by 16.9% to SEK 63.0m, representing a 12.4% margin—a slight decrease of 0.8 percentage points compared to Q2 2023. Earnings per share rose 29.4% year-on-year to SEK 1.41. With a solid foundation for growth, a scalable business model, and limited investment requirements, we continue to see strong prospects for earnings to grow in line with revenues.

M&A adds potentially additional upside

Preliminary sales figures for July 2024 indicate a continued slowdown in growth within Central Europe, while North America remains a strong performer. As a result, we have made minimal adjustments to our revenue forecasts. For 2024, we project total revenues to slightly exceed SEK 2bn. Over the next three years, from 2024-2026, we expect total revenue to grow at an average of 10.5% per year. This is below the company’s target of achieving at least 20% average growth during the same period. However, our model does not account for potential future acquisitions, which remain a significant focus for the company. We have revised our gross margin expectations downward, which negatively impacts profitability further down the income statement. For 2024, we now anticipate an EBITDA of SEK 248m, down from our previous estimate of SEK 263m. Over the 2024-2026 period, we project an average EBITDA margin of 12.5%, compared to our earlier estimate of 13.4%, but still aligned with the company’s goal of maintaining an EBITDA margin above 10%.

In our base case scenario, we estimate a fair value per share of SEK 86.8, up from SEK 84.9. This increase is primarily driven by a lower discount rate, reflecting reduced market and size premiums. Our valuation corresponds to an EV/EBIT multiple of 11.7x NTM (next twelve months). The peer group trades at a median EV/EBIT multiple of 9.9x NTM. Strong growth prospects and continued margin expansion justify the premium.

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