Equity research Zinzino, Q3 2024: Growth outlook trumps margin slip

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Q3 2024 earnings (EBITDA) were about ten per cent below our expectations. However, we judge the shortfall was largely due to costs related to growth initiatives. We expect Q3 to represent a trough in margins, and the growth outlook remains solid. 

Growth target in the bag

The highlight of the Q3 2024 report was the sustained strong revenue growth above the 20% growth target. Total revenue increased by 22% to SEK 533m, in line with the preliminary sales figures reported on 3 October. The company states that it will achieve its growth target for the year, further supported by the solid preliminary October sales released on 4 November (+20%). While Zinzino is somewhat behind the previously stated ambition of opening up 3-6 new markets in 2024, the company states that it is working on establishment processes in New Zealand, the Philippines, Peru and China. We believe this bodes well for growth opportunities from continued expansion in new markets in the coming years. As previously announced, Zinzino has signed a letter of intent to acquire US-based direct sales company Zurvita, which has annual sales of around USD 30m. Zinzino appears optimistic that an acquisition may be completed in a few months. We believe Zurvita would have a clear positive impact on our estimates and valuation, but we have not yet modelled it in our forecasts due to uncertainty until closing.

We expect margin headwinds to abate

Although a lower gross margin y-o-y was in the cards due to raw material cost increases and normalized remuneration to distributors, the outcome was slightly below what we had anticipated as the gross margin decreased by 1.6 percentage points to 33.6%. Our updated forecast was 33.9%. Nevertheless, gross profit grew by 7% to SEK 179m, compared to our forecast of SEK 181m. However, we estimate that important input prices, for e.g., olive oil, may have peaked and will likely be less of a headwind going forward. The EBITDA result declined by 11% y-o-y to SEK 63m, corresponding to a margin of 11.8%. Our updated estimate was for SEK 69m, corresponding to a margin of 13 %. Hence, the main deviation from our forecast was higher operating costs. In this regard, Zinzino highlights the expansion of the establishment into existing and new markets such as France, Switzerland and Serbia. Also, it recently launched a new skincare product, Collagen Boozt. Accordingly, we believe the shortfall in earnings compared to our estimates is probably largely explained by initiatives to support growth.

Expansion to new markets and M&A adds potential upside

We trim our earnings estimates only slightly, as solid sales momentum largely compensates for lower margins. The largest downward adjustment is for 2024 (-4% on EBIT), mainly due to the shortfall in Q3 2024. Over the next three years, from 2024-2026, we expect total revenue to grow at an average of 13.4% per year. Note that our model does not account for potential future acquisitions, which remain a significant focus for the company. Also, entering new markets could boost the prospects. We reiterate the base case fair value per share at SEK 97. Potential share catalysts include acquisitions and expansion into new markets.

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