Initiation of coverage Zinzino: Growth and margin expansion expected

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Initiation of coverage Zinzino, April 11 2022

Zinzino offers food supplements in over 100 markets worldwide through direct selling. Critical sales volumes have since long been reached. With a cost-effective expansion strategy and scalability, margins can improve further with continued growth. We estimate a fair value per share of SEK 60.7 for the next 6-12 months.

Earnings per share up 18x

Since founded in 2007, Zinzino (the company or the group) has grown into a global player in the food supplements industry. Today the company is active in over 100 markets. Zinzino sells its products mainly on subscriptions along with self-tests. With anonymised data from 100-thousands of tests, there is evidence of the products’ efficacy. That, along with the company’s method of distribution, direct selling, has been crucial to the company’s strong performance: in Covid-weighted 2021, revenues of SEK 1 371 million were reported, corresponding to a growth of 20.4 per cent. Over the past four years, revenues have grown at an average annual rate of 26.2 per cent. In parallel, operating margins have increased from 1.2 per cent in 2018 to 8.5 per cent in 2021. Over the same period, earnings per share have increased by a factor close to 18.

Continued growth with improved profitability in the cards

Expansion into new geographies has been a critical driver of growth. The company is In Europe established in the most attractive markets, such as Germany, Italy, and Spain. However, we estimate that the market share is still barely one per cent. In other words, there is plenty of room for continued growth in Europe, especially as market conditions are now looking more “normal” after Covid. We expect the tragic war in Ukraine to hurt some European submarkets.

Since a couple of years back, the company has established itself in several countries in Asia. So far, this effort has been successful, and further expansion into new countries in Asia is expected to be an essential growth driver going forward. In recent months, development has been held back partly due to the reintroduction of restrictions in connection with Covid.

In the short term, the gross margin is likely to be squeezed with the rising cost of goods sold, freight, etcetera. Zinzino has made a price increase of six per cent on average, acting as a counterweight. Over time we see room for gross margin improvement compared to sector peers. With direct selling, geographic expansion becomes relatively cost-effective at reduced risk. We therefore believe the company can continue to grow the business in parallel with margin improvement.

Good potential upside in a share under pressure

We expect an average annual growth rate of 10.7 per cent in 2022-2025. Recently, an acquisition strengthened the skincare portfolio and the partner network. More potential acquisitions could improve the growth rate further. In our base case, the operating margin increase from 8.2 per cent in 2022 to 9.8 per cent in 2025 and 11.5 per cent in 2031. That is still slightly below larger health food companies. By combining a multiple valuation with a DCF valuation, a fair value per share of SEK 60.7 for the next 6-12 months is calculated. The stock has been under pressure and now trades an EV/EBIT multiple of 10.0x. That though despite an expected EBIT growth of 16.4 per cent through 2024. The multiple also represents an unjust discount to the peer group.

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