Research update Zinzino, Q4 2022: Profit growth in the cards for 2023

Equity research Zinzino

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In Q4 2022, Zinzino reported revenues in line with expectations. Driven by the gross margin, profitability was well above expectations. With an increasing gross margin and reduced headcount, profit should grow in 2023. In a base case scenario, a fair value per share is calculated at SEK 48.5 (44.4).

Gross margin up for the second year in a row

In line with our expectations, Zinzino increased revenues in Q4 2022 by 7.5% to SEK 429m. For the full year 2022, revenues amounted to SEK 1,443m, representing a growth of 5.2%. Central Europe, followed by North America and Southern and Western Europe as the main growth drivers. Operations in the Nordic region continued to hold back the group’s growth. APAC also held back the group’s growth for the full year. However, preliminary sales figures for February 2023 show growth in all eight geographic markets

Gross profit for Q4 2022 landed at SEK 150m, corresponding to a margin of 34.9% – well above our forecast of SEK 126m and 31.0%, respectively. Despite inflationary pressures, Zinzino increased its gross margin for the second consecutive year. For the full year 2022, the gross margin was 32.3%, an increase of 1.1 percentage points compared to 2021. Gross profit is calculated as revenue reduced by the cost of goods sold and revenue sharing with distributors. Compared to other players with similar distribution models, there is room for Zinzino to further reduce its distributor costs over time. Thus, we believe the gross margin can increase slightly over time.

For Q4, the EBIT result and EPS were also above our expectations. For the full year 2022, costs (excl. dir. costs and depreciation and amortisation) increased by 21.9%. Thus, despite a strengthened gross margin, EBIT declined by 25.0% to SEK 87m in the full year 2022. However, it should be noted that the headcount at the end of Q4 2022 fell to 207, compared to 233 at the end of Q3 2022 and 224 at the end of Q4 2021. That improves the outlook for profitability.

Growth and margin expansion in 2023

For 2023, we expect revenues of SEK 1,630m, corresponding to a growth of 13.0%. That is at the upper end of the company’s guided range. In 2023-2025, we expect a compound annual growth rate of 10.6%. The company’s target is a yearly growth above 10%. Given the machine that Zinzino has got rolling in the big market, Central Europe, we expect this submarket to continue to be a prominent growth driver. In 2023, we expect the EBIT result to grow 30.2% to SEK 113m, corresponding to a margin of 8.4%. The improved profitability can mainly be attributed to scalability and a slightly better gross margin. By 2025, the EBITDA margin is expected to increase to 9.2%. The company’s goal is to increase the EBITDA margin to above 9.0% by 2025.

A higher fair value with higher profitability

In a base case scenario, we calculate a fair value per share of SEK 48.5 (44.4). The upward revision is due to higher profitability assumptions. Our valuation corresponds to an EV/EBIT multiple NTM of 13.4x. The median value of the peer group is 12.4x. Today, Zinzino shares are trading at an EV/Sales NTM of 10.6x – an unjustified discount.

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