Research update Zinzino, Q1 2023: Share price does not reflect the profitability boost

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Equity research Zinzino

In Q1 2023, Zinzino delivered revenues inline with our expectations. We were pleasantly surprised by a robust gross margin, which significantly exceeded our forecasts. Given the higher margins, we have revised our profitability forecasts. In a base case, a fair value per share of SEK 55.1 (48.5) is calculated.

Rising gross margin for the second quarter in a row

With total revenues of SEK 394m in the Q1 2023, Zinzino increased its revenues by 18% year-on-year, in line with our expectations. With the exception of the Nordic region and APAC, the company witnessed revenue growth across all submarkets. The crucial submarket of Central Europe continues to act as a driving force with a revenue growth of 54%. Over the upcoming quarters, we anticipate continued high growth in Central Europe, albeit at a slightly decelerating pace due to rising comparative figures.

The gross profit of SEK 131m demonstrated an impressive growth of 31.7%. The gross margin increased by 3.5 percentage points to 33.2%, surpassing our forecast of 119 MSEK and 30.3%, respectively. A significant improvement in the gross margin was already observed in the Q4 2022, indicating that the higher level for the gross margin may persist. Considering this, along with overall lower delivery costs, we have adjusted our estimates for future gross margin upwards.

The EBITDA result surged by a remarkable 72% to 44.4 MSEK, corresponding to a margin of 11.3%. Our forecast stood at 33.1 MSEK and 8.4%, respectively. The deviation from our projected EBITDA level can be attributed to improved profitability after trade goods and other direct costs.

Growth and margin expansion in 2023

In 2023, we anticipate total revenues of SEK 1,633m, corresponding to a growth rate of 13.1%. With the exception of the Nordic region, we expect positive growth across all of the company’s submarkets. Over the years 2023-2025, we project an average annual growth rate of 10.4%. Potential acquisitions and new markets, such as South America, present potential upside in our assumptions. The company’s goal is to achieve an annual growth rate above 10%. In 2023, we anticipate a 19.0% increase in gross profit to 554 MSEK, resulting in a margin of 33.9%. The EBITDA result is expected to grow by 44.4% to 162 MSEK, corresponding to a margin of 9.9%. This represents a clear upward adjustment from the previous forecast of 8.4%. By 2025, we have assumed that the EBITDA margin will increase to 10.4% (previously 9.2%). The company’s goal is to surpass a 9.0% EBITDA margin by 2025.

A higher fair value with higher profitability

In a base case, the fair value per share is estimated at SEK 55.1 (48.5). The upward revision is primarily due to increased profitability assumptions. Our valuation corresponds to an EV/EBIT multiple NTM of 11.7x. The median value for the peer group is 11.4x. Currently, Zinzino’s stock is trading at an EV/EBIT NTM of 9.1x. Zinzino is expected to grow significantly faster than the peer group, leading to margin expansion, and thus the discount is considered unwarranted.

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