Growth has continued at what appears at an almost breakneck pace in Q4 2024 for Zinzino, with a preliminary sales increase of 34 per cent, including 58 (!) per cent for December isolated. The growth topped our expectations by a wide margin, and December is the strongest monthly percentage increase since March 2021. In our latest research update, we projected a 20 per cent growth in Q4. The main explanation for the deviation is accelerated growth in core European regions and continued robust sales increase in North America.
In Q3, a lower gross margin and higher OPEX weighed on profits, contributing to a slight earnings disappointment versus our expectations. At the same time, it is clear that Zinzino has focused on growth initiatives, including the launch of a new skincare product and geographical expansion, which in the short term are a drag on margins. We believe, however, that the gross margin headwinds from raw material costs are abating, and Zinzino management was already cautiously optimistic on this point following the Q3 report.
For Q4 2024, we also assume lower EBITDA margins year over year; however, in contrast to the previous quarter, this time, we believe the strong sales should translate into a return to profit growth.
We expect Zinzino to stick to its previously communicated financial targets, i.e., an average sales growth of 20% minimum for the period 2024–2026 and an operating margin before depreciation/amortisation above 10%. The comparison for growth is getting more difficult; however, Zinzino has a strong focus on acquisitions (see below), which could be a major contributing factor in 2025. For this reason, we also conservatively assume an unchanged dividend of SEK 3 per share.
We raise the fair value ahead of Q4 2024 report
Following the stronger-than-expected preliminary Q4 sales figures, we have raised our sales and EBITDA estimates for 2024E-2026E by 3-8 per cent (see below). We use the same valuation method as previously and calculate a new base case valuation of around SEK 108 per share (97). We will review our estimates and valuation further following the Q4 report on 27 February.
Read our latest research update here.
Bidding for Zurvita’s assets
Zinzino also recently reported that one of its primary acquisition targets, the US direct selling company Zurvita, has filed for Chapter 11. In conjunction with the filing, Zinzino has provided loans of USD 4.5m and made an offer to acquire Zurvita’s assets in a so-called stalking horse bid. A stalking horse bid is a standard method for the distressed company, in this case, Zurvita, to agree with an interested party (here: Zinzino) to set a minimum purchase price for its assets. The loan to Zurvita is a Debtor in Possession (”DIP”) Financing. DIP loans are typically secured, and Zinzino states that the loan to Zurvita will be repaid if another bidder offers a higher price and prevails in the bidding process.
We do not know the full background of Zurvita’s filing for chapter 11, but we assume there is a need to restructure its finances and operations. We should note, however, that Chapter 11 typically allows for continued operations with some restrictions. Conversely, there might be an opportunity for Zinzino to get its hands on the assets for a lower price than initially indicated, depending on the outcome of the bidding process. We understand the process typically takes 1-3 months, possibly impacted by the holiday season. As previously reported, Zinzino, in June, signed a letter of intent to acquire Zurvita for USD 16.5m + USD 0.5m in potential earn-outs.
The conclusion is that while the Chapter 11 filing implies that Zurvita has some operating or financial challenges, and the process has been more drawn out than initially hoped, Zinzino may be able to adjust the previously communicated purchasing price accordingly to an attractive level. We still believe Zurvita would have a positive impact on our estimates and valuation, especially in the medium to longer term, but due to uncertainty until closing, we have not yet modelled it in our forecasts.
As demonstrated by the solid sales development in the North America region, we see no signs that Zinzino’s US sales have been negatively affected by Zurvita’s troubles (Zurvita is already a distributor of Balance Oils).
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