LHV Bank research - Annual Review

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MADARA Cosmetics AS Annual Review

27th July 2021


27th July 2021

MADARA Cosmetics AS

Table of Contents Investment Summary

1

Company Overview

2

MADARA Cosmetics Group

2

Management

2

Shareholders

3

History

3

Research and Development

4

Manufacturing

4

Raw Materials

4

Products

4

Brands

5

Certification and Standards

6

Main Markets

6

Distribution Channels

6

COVID-19 Resilience

7

Sector Overview

8

Financials

11

Revenues

11

Cost Structure

11

Profitability

12

Non-Current Assets

12

Investments

12

Debt Position

13

Dividends

13

Valuation

14

ESG Considerations

14

Discounted Cash Flow

14

Peer Valuation

15

Valuation Summary

17

Key Risks

17

Financial Tables

18

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Investment Summary

Company Profile

e-commerce is driving growth and profitability

Bloomberg Ticker:

Listing Market:

Given MADARA’s dedicated ESG approach, we would highlight the Company as an ESG investment, being one of the first companies in the Baltic region that is recognised as both eco-friendly and ESG compliant. While the Company is relatively small compared to its peers, it presents an interesting opportunity considering its purely organic credentials – a sector that is growing strongly worldwide. From a financial perspective, the Company’s development has been relatively flawless so far. It has consistently improved its revenues and profits over the past five years, a trend that is likely to continue. As we argue in this report, the Company possesses the products, market presence, and financial and operational capacity to expand for years to come.

Sales (EURm)

2018

2019

2020

2021E*

2022E*

2023E*

9.5

11.5

16.1

20.3

24.1

27.0

Sales growth (%)

28.7

21.2

39.2

26.6

18.6

12.0

Net profit (EURm)

1.5

1.6

3.4

4.6

5.4

6.4

EPS (EUR)

0.4

0.4

0.9

1.2

1.4

1.7

19.6

18.8

21.7

24.0

20.1

17.1

0.1

0.1

0.1

0.4

0.6

0.7

Payout yield (%)

1.1

1.5

0.8

1.4

2.1

2.5

P/B (x)

3.5

3.1

6.0

7.1

5.9

4.9

EV/Sales (x)

2.7

2.3

4.3

5.1

4.3

3.8

13.1

12.1

16.2

18.4

15.5

13.2

EV/EBIT (x)

17.7

17.9

19.5

21.0

17.3

14.7

ROE (%)

19.3

17.4

31.4

32.7

31.8

31.2

P/E (x) Payout per share (EUR)

EV/EBITDA (x)

#

Consumer Discretionary

Sector (Bloomberg):

Consumer Products and Services

Website:

www.madaracosmetics. com

Share Data, as of 20th July 2021 Current Share Price (EUR):

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

29.00

Fair Value Range (FVR), EUR:

23.80-26.30

Downside, % (to mid-point of FVR):

13.62

52-week High/Low (EUR):

31.20/8.80

3m Avg. Daily Volume (th):

0.21

Market Cap (EURm):

109.31

Ordinary Shares (m):

3.77

Key Shareholders, as of 9th Feb 2021 Uldis Iltners

23.93%

Lote Tisenkopfa-Iltnere

23.77%

Oy Transmeri Group AB

22.94%

Liene Drāzniece

6.79%

Zane Tamane

6.67%

12-Month Price Performance 30 25 20 15 10 5

LHV Fair Value Range: EUR 23.80-26.30*

DCF EV/EBITDA P/E 20

25

* As of 27th July 2021

Source: MDARA, LHV *2021E-2023E multiples are based on the share price (20th July 2021) of EUR 29.00 per share. #Payout per share include dividends and share capital reduction.

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LV0000101624

Industry (Bloomberg):

Considering the ongoing COVID-19 pandemic, given the relatively large and growing portion of e-store sales in its revenue mix, we believe the Company proves more resilient throughout this crisis compared to many other discretionary consumer stories. Also, its performance could be further backed by the ‘lipstick effect’, stating that consumers tend to prefer less costly beauty and luxury goods during uncertain times. Key Numbers (EURm)

MDARA LR

ISIN:

EUR

MADARA Cosmetics AS (hereafter referred to as ‘MADARA’ or the ‘Company’), based in Latvia, is a leading, fast-growing producer of organic cosmetics and skincare products. It was founded in 2006 and has already established a firm position in the Baltic and Finnish markets, with an increasing presence in other countries. MADARA is on track to become a leading European brand in natural and organic cosmetics. The Company’s underlying strengths include developing its own unique cosmetics and skincare formulae, its ECOCERT certification, and its in-house design and PR agency. It operates out of modern, state-of-the-art facilities close to the Riga International Airport. The scalability of the production capacities is another strength of MADARA. According to the management estimates, the production volume could easily be doubled or even tripled with the existing capacity, without any substantial capital expenditure (‘capex’), by increasing the number of shifts and batch sizes. Currently, the Company employs nearly 160 people. MADARA creates, produces, and sells organic skincare products from pure, high-quality organic ingredients sourced from the Nordic region. The Company targets two types of customers through its two brands – 1) ‘MADARA’ is an affordable luxury brand sold primarily through its own stores, premium resellers, and e-stores, and 2) more affordable products come under ‘MOSSA’ brand, which are sold through various distribution channels, such as drug stores. In addition to this, the Company also undertakes contract manufacturing for third parties. The Company already enjoys strong brand recognition in the Baltic and Nordic regions, with a solid track record in developing and introducing new products to the market. As such, we believe it can capitalise further on that base, increasing its share in existing markets and penetrating new ones. With nearly 15 years of experience, in our view, the accumulated intellectual property, including the value of its brands and trademarks, product formulations, and production specifications play an important role in the whole value creation process of MADARA, although the Company’s intangibles are difficult to quantify at this stage.

First North Baltic Share List

LHV.EE

30

35

40


27th July 2021

MADARA Cosmetics AS

In valuing the shares of MADARA, we are following two main valuation methods: 1) an income approach, based on the Discounted Cash Flow (‘DCF’) calculations and 2) a market approach, based on valuation multiples of a peer group of comparable listed companies. We have used the weighted average of values derived from the DCF and peer valuation, applying different weights to each method. Overall, based on our current projections for MADARA and other assumptions, we decided to slightly increase our fair value range (‘FVR’) for the stock from the previous EUR 8.60-9.40 to EUR 23.8026.30 per share.

Company Overview MADARA was established in 2006, aiming to create effective and innovative organic skincare products, which are sustainable, safe and completely natural, and draw on examples of the best practices. With this ambition, the Company has managed to develop a competitive brand within the organic skincare niche that is distributed through both conventional and speciality channels. The ‘MADARA’ brand became a local pioneer in the field of natural cosmetics. Each product is exclusively developed and manufactured in MADARA’s own laboratories and production facilities, enabling it to take 100% control over all processes. Organic ECOCERT certification, GMP and ISO standards, in vitro and in vivo researches emphasise MADARA’s passion for quality and perfection in every detail. The Company exports its own brand products worldwide as well as offers contract manufacturing services.

MADARA Cosmetics Group The MADARA Cosmetics group is made up of several companies. AS MADARA Cosmetics is the parent company responsible for the development, manufacturing, and sale of organic cosmetic products under two brands: ‘MADARA’ and ‘MOSSA’. MADARA Cosmetics has three fully owned subsidiaries: MADARA Retail SIA, Cosmetics NORD SIA, and MADARA Cosmetics GmbH. MADARA Retail SIA manages four MADARA brand stores in Riga, located in shopping centres – “Galerija Centrs”, “Spice”, “Alfa”, and “Akropole”. The newest store in “Akropole” was launched in April 2019. In 2020, the revenues of MADARA Retail SIA dropped 8.5% y-o-y to EUR 0.86m (accounting c.a. 20% of the Company’s total sales in Latvia), due to temporary store closures in Latvia because of the COVID-19 related restrictions imposed by the local government. Cosmetics NORD SIA is focused on rendering contract manufacturing services using the production infrastructure and capacity of MADARA, with sales amounting to EUR 0.3m in 2020, down 51% y-o-y, due to difficult circumstances related to the COVID-19 restrictions in the operation of several partners. However, the management claims that in response to the drop in turnover, Cosmetics NORD SIA developed a new contract strategy, which is actively implemented in 2021. MADARA Cosmetics GmbH provides cosmetics marketing services in Germany and organises the distribution of MADARA products in that market. Also, there is a 19% minority shareholding in SIA Farmācijas, biomedicīnas un medicīnas tehnoloģiju kompetences centrs. Both facilities have been formed within the framework of the state aid programme ‘Competence Centres’, being implemented with the help of the European Regional Development Fund. The main aim of the programme is to bring together companies and scientific institutions working in the same field as well as to encourage cooperation between the industry and academia to foster new methods and technologies.

Management The operational management of the Company is structured as a usual two-tier system, comprising a management board and a supervisory board. The management board is responsible for the day-

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INSTITUTIONAL EQUITIES

to-day management of the Company’s operations and is authorised to represent the Company based on the applicable laws and the Articles of Association. The supervisory board of the Company is the supervisory body representing the interests of the shareholders in general meetings and exercising oversight over the activities of the management board. Supervisory Board According to the Articles of Association, the supervisory board consists of five members who are appointed by the General Meeting for five years. Currently, the composition of the supervisory board is as follows: Anna Ramata-Stunda – Chairman of the supervisory board. Born in 1984. She graduated from the University of Latvia in 2008 with a master’s degree in life sciences and biology. Since 2010, she has worked as a researcher and lecturer at the University of Latvia, where she has participated in research projects for the Company. She is also a board member and co-founder of SIA InCell, which provides biotechnology and research services. Ms Ramata-Stunda is the co-author of many scientific publications, as well as holds several patents. Liene Drāzniece – Deputy Chairman of the supervisory board. Born in 1979. She graduated from the Latvian Academy of Art in 2003 with a bachelor’s degree in visual communication, specialising in the field of graphic design. In 2007, Ms Drāzniece graduated from the Istituto Marangoni Milano, Master Design Direction programme, where she studied brand strategy. Before co-founding MADARA, she worked in the international advertising agencies McCann, Leo Burnett, and Lowe as an Art Director for major Latvian brands, and she is the author of several brand identities for consumer goods and niche products. Since 2009, she has been the Art Director of the Company. In 2017, she also became a lecturer at the Riga School of Design and Art in the Department of Advertising Design. Edgars Pētersons – Member of the supervisory board. Born in 1981. He graduated from the Stockholm School of Economics in Riga in 2007 with a bachelor’s degree in economics and business administration. He is a founder and strategic planner of WKND, an advertising and strategic agency. He is also a founder and senior consultant of the company Pattern Consulting, a business consulting agency. Mr Pētersons has gained strong experience in strategic planning, branding, and marketing consulting areas. Sari Hannele Rosin – Member of the supervisory board. Born in 1972. She graduated from the South Carelian Business School in 1997 with a bachelor’s degree in business and economics. She is the CEO of Oy Transmeri Ab, a subsidiary of Oy Transmeri Group Ab and the market leader in Finland for many cosmetics categories, e.g. natural organic cosmetics. Oy Transmeri Group Ab is a strategic shareholder of MADARA with a 22.9% stake. She is also the CEO of Oy Sultrade Ltd, a sister company of Oy Transmeri Ab, importing, selling, and marketing well-known sports brands in Finland and the Baltics. Since April 2020, she is the Chairman of the board of the Finnish Cosmetic and Detergent Association. Anna Andersone – Member of the supervisory board. Born in 1981. She graduated from the Stockholm School of Economics in Riga in 2002 with a bachelor’s degree in business and economics, specialising in the fields of IT and marketing. Ms Andersone started her career in Marketing and Communications at McCann Riga and was promoted to a Project Director and Strategist (2003-2008), working with pan-Baltic campaigns. She gained international experience working in the UK and France. She is a co-founder of several start-up companies and holds management positions in numerous companies, including SIA HungryLab, SIA Froont, SIA Hello World, SIA One two free, and TechHub Riga foundation.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Management Board

Shareholders

The management board comprises three members who are appointed by the supervisory board for a term of five years. Each member of the management board may represent the Company alone. The current composition of the management board is as follows: Lote Tisenkopfa-Iltnere, Uldis Iltners, and Paula Tisenkopfa.

As at the end of 2020, MADARA had a total of 3,769,242 shares outstanding, with a nominal value of EUR 0.10 each. The increase in the number of shares compared to 2019 (3,745,242) is due to the issuance of 24,000 shares to option holders. The Company is effectively controlled by Mr Iltners and Mrs Tisenkopfa-Iltnere, who are spouses and exercise their voting rights jointly. With the combined ownership of 47.7%, these two shareholders jointly exercise a significant degree of influence over the Company. Other larger shareholders include Oy Transmeri Group AB, Mrs Liene Drāzniece, and Mrs Zane Tamane. The latter two were among the founders of the Company back in 2006. Oy Transmeri Group AB (‘Transmeri’) is a Finnish familyowned company mostly engaged in importing and distributing daily

Lote Tisenkopfa-Iltnere – Chairman of the management board. Born in 1982. She graduated from the University of Latvia in 2005 with a bachelor’s degree in Asian studies, where she mastered Asian culture, business, and Japanese language. She co-founded MADARA in 2006. In 2009, Ms Tisenkopfa-Iltnere completed the Swedish Institute Management programme of leadership and corporate social responsibility practices. Ms Tisenkopfa-Iltnere is the wife of Mr Iltners and a sister of Ms Paula Tisenkopfa. Uldis Iltners – Member of the management board. Born in 1983. He graduated from the BA School of Business and Finance in 2003 with a bachelor’s degree in business management and leadership. Before co-founding MADARA in 2006, he worked as the CEO and analyst at an IT consulting firm providing computer simulation assisted production controlling and optimisation for manufacturing companies. He is a board member of SIA Wolf Candles, SIA “MC Properties”, and SIA Kalvi. Paula Tisenkopfa – Member of the management board. Born in 1988. She graduated from the University of Latvia with a bachelor’s degree in philosophy. Ms Tisenkopfa co-founded MADARA in 2006, and since then, she has been actively involved in sales and export expansion, as well as in the areas of product and brand development. Currently, Ms Tisenkopfa’s main areas of responsibility are human resources and matters of corporate governance.

MADARA Shareholders (9th Feb 2021) Uldis Iltners 15.90% 23.93%

6.67%

Lote Tisenkopfa-Iltnere Oy Transmeri Group AB

6.79% 23.77% 22.94%

Liene Drāzniece Zane Tamane Other

Source: MADARA

History Major milestones in the Company’s history are listed below: 2005

The MADARA brand is conceived and developed by Ms Tisenkopfa-Iltnere and Mr Iltners.

2006-2007

The brand is launched, and the first products are introduced into the Latvian market.

2008

MADARA becomes a leader in the natural/organic cosmetics sector in Latvia. The Company opens its first factory and receives ECOCERT certification for its products and launches industrial-scale production.

2008-2009

MADARA Retail SIA is established, and MADARA brand shops are opened in Riga.

2009

MADARA Retail SIA is established, and MADARA brand shops are opened in Riga.

2011

The international online store is opened, and over 3,000 purchases are made on the first day of operation.

2012

The Company shapes a new approach to organic cosmetics - in vitro and in vivo research rejuvenating effects of birch juice and northern plant extracts; a new anti-ageing line ‘Time Miracle’ is developed based on these results.

2013

MADARA starts successfully collaborating with Finnish blogger, Noora Shingler, launching custom-made products for the Finnish market, and goes on to become the third best known organic cosmetics brand in Finland.

2014

Harper’s Bazaar cites MADARA’s products as “Natural cosmetics for Aesthetics” and the concept store-salon, SKIN CAFE, is opened in Riga.

2015

The Company acquires and develops land for its new factory and office building. Trial production commences there. Ms TisenkopfaIltnere, the CEO, and the Company are ranked respectively 4th and 7th in the annual Business Reputation Awards 2016 by the Latvian Investment and Development Agency (‘LIAA’), Nords Porter Novelli, and Dienas Bizness newspaper.

2016

MADARA named the “No.1 Greenest Brand” in the annual ranking of “Most Loved Brands in Latvia”, and the new factory opens and commences full-scale production.

2017

Successful IPO priced at EUR 6.25 per share and listing on the Nasdaq Riga First North.

2018

MADARA launches a new sunscreen product line

2019

New organic makeup line was launched in September 2019.

2020

A new line of lipsticks and hygienic lip balms was launched. Also, the Company developed eyelash and eyebrow fixation and growth serum, ANTI skin disinfectant line, IMMU oral protection line, Derma Collagen facial skincare product line, as well as moisturizing cream with Centella Asiatica (CICA) plant extract in SOS Hydration skincare line.

Source: MADARA

3

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

consumer goods and selective cosmetics in Finland and the Baltics. Transmeri was established in 1928 by Didrichsen family. Transmeri is one of the leading marketers of cosmetics in Finland, introducing hundreds of new cosmetic products to the Finnish market every year. Transmeri acquired a 6% stake in MADARA from the IPO in 2017 and increased its holding to over 23% in 2018, buying 17.09% from Sustainable Investments SIA. Currently, Transmeri holds a 22.9% stake in the Company.

Research and Development One of the key strengths of the Company is an in-house laboratory used for research and development, as well as ongoing testing and quality assurance of products. These tests include, but are not limited to, pH measurements, conductivity testing, and surface quality. Additionally, having its own laboratory means that each of the Company’s new products is exclusively developed in-house. This allows for a higher diversity of formulations, quick integration of innovative ingredients and solutions, and rapid adaptation to changing consumer preferences and market trends. In addition to the in-house laboratory, the Company closely cooperates with several academic institutions and organisations, such as the University of Latvia, the Riga Technical University, the Riga Stradins University, and several dermatological clinics. The benefit of this setup can be seen from 2017 when the Company managed to develop a sun protection formulation based on mineral filters. In the certified natural cosmetics industry, sun protection products are considered to be technically one of the most complicated products. MADARA worked on the development of these products for almost five years and introduced the new sun protection product line to the market in 2018, launching several new products of this category during 2019. In 2018, MADARA also started the development of a certified natural makeup product range. According to the management, this is considered the largest development project of the Company over the last five years, which involves the development of about 50 new products and also the strengthening of the know-how and increasing the production capacity of decorative cosmetics. The new makeup line was introduced to the market at the end of September 2019, while the Company continues to develop new products of this category and expand its product range. A new line of lipsticks and hygienic lip balms was developed and launched in 2020. Also, the Company developed eyelash and eyebrow fixation and growth serum, ANTI skin disinfectant line, IMMU oral protection line, Derma Collagen facial skincare product line, as well as moisturising cream with Centella Asiatica (CICA) plant extract in SOS Hydration skincare line.

Manufacturing MADARA has been manufacturing on an industrial scale since 2008, from when it has strictly produced all of its products and had complete control of every stage of the manufacturing process. In late 2015, the Company completed the development and trial production phase of a new factory, which has been fully commissioned since February 2016. While the two production sites continued operating in parallel for some months, by September 2016, all production had moved to the new site. The new factory is built in a way that the production can be scaled upwards easily. The Company estimates that using existing equipment, it would have the capacity to more than double the current production volumes by increasing the number of shifts and batch sizes. Currently, the Company is making additional capital investments in packaging machinery and a mixing unit in the existing production plant. Also, the planned new production plant (the expected start of construction works in 2023) will allow further growth. There is also room to accommodate more equipment, allowing for even greater expansion. Besides, the Company aims for

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INSTITUTIONAL EQUITIES

a high level of environmental sustainability. This includes having a framework for environmental management with procedures monitoring all the key environmental impact indicators, such as CO2 emissions, energy and water consumption, rainwater pollution, and waste management, all of which are in place to evaluate and improve the Company’s environmental performance. With its extra production capacity, the Company, under the Cosmetics NORD subsidiary, offers contract manufacturing to third parties. It has developed a reputation as a reliable supplier of certified manufacturing services for high quality, modern natural skincare, haircare, and baby care formulae. Contract manufacturing customers are offered a range of readymade formulae already tested in the market that can be quickly adjusted to meet their specific needs. Alternatively, the Company is able to source and incorporate specifically selected ingredients and perform research to develop completely new formulations. This has been a growing business line for the Company, especially within the non-domestic market. It is believed that this business line will assist the Company’s expansion in foreign markets.

Raw Materials MADARA prides itself on using pure, high-quality ingredients - c.a. 400 natural ingredients to formulate and make cutting-edge effective cosmetic products. Many raw materials are harvested from the forests, meadows, and lakes of the Northern and Arctic regions. The use of these Northern ingredients is one of the main things that differentiates the Company from its competitors, both in product performance and brand story. Raw materials of the following main categories are used: • active ingredients such as plant extracts, unique plant oils, hya-

luronic acid, vitamins; • oils (plant oils, plant butter, waxes, natural emollients, etc.); • speciality waters: birch water, floral waters, etc. (some of which

may be considered to be active ingredients); • surfactants (washing/foaming ingredients); • emulsifiers, gelling agents, stabilisers; • natural fragrances; • preservatives; and • colourants, pigments.

The raw materials used by MADARA are purchased from trusted direct suppliers who harvest these ingredients from nature (birch water, fossil mud) or extract active substances from organic plant matter (plant extracts, cold-pressed oils, etc.). Raw materials that are readily available in the market like plant oils, natural emollients, surfactants, emulsifiers, preservatives, as well as general active ingredients like hyaluronic acid, vitamins, anti-age and lifting actives are purchased from reputable manufacturers directly or through their distribution partners.

Products The Company’s product portfolio includes over 150 different cosmetic products, including facial cleansers, toners, moisturisers, masks, serums, facial oils, eye- and lip-care products, makeup, suncare products, soap bars, liquid soaps, body moisturisers, deodorants, shampoos, conditioners, as well as products for babies and children. While the primary target of these products is for the 25+ age group, certain product lines are designed for all ages and some for children. MADARA undergoes extensive research when creating and choosing a product. For example, the ‘Time Miracle’ product

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

line, the world’s first anti-ageing skincare product based on birch water, has been proven to reduce the signs of ageing. According to the Company, birch water accelerates skin cell division by 25%, which can reverse both genetic and environmental ageing. Facial care products, accounting for 57% of the total revenues in 2020, dominate the breakdown of MADARA’s sales by product categories. Other larger product groups of the Company include body care (12%) and makeup (12%) products, followed by anti-age (11%) and hair care products (7%). The launch of makeup products in September 2019 affected the breakdown of MADARA’s revenues by product groups significantly in 2020 compared to 2019. By the end of 2019, the makeup line was launched in Latvia, Finland, Germany, and France. The turnover share of other categories decreased due to relatively faster sales growth of facial and makeup categories driven by new product launches. In 2020, MADARA launched a number of new products in the market, continuing to prove itself as an innovative and contemporary manufacturer of natural cosmetics. These Brand

new products have been added to the existing product categories, as well as new categories have been launched. Among the new product categories, the ACNE range for problem-prone skin should be highlighted, which has successfully attracted a new segment of cosmetics users for the Company. The Company also started the production of both classic lip balms and lipsticks, which is an important addition to the makeup line. The most important individual new products are Time Miracle Hydra-Firm Hyaluron Concentrate Jelly and FAKE IT Healthy Glow Self Tan Serum for the face, which have rapidly become the bestsellers for MÁDARA. In 2020, the new products accounted for EUR 2.2m of the Company’s total turnover.

Brands The Company’s production is sold under two main brands – ‘MADARA’ and ‘MOSSA’. The brand characteristics and positioning are summarised in the following table.

‘MADARA’

‘MOSSA’

Brand positioning statement

‘MADARA’ provides natural, highly effective, visually attractive skincare products for intelligent, urban women aged 30-40. It uses locally sourced Nordic ingredients, and is developed and manufactured through extensive research and testing, in cooperation with the in-house design team.

‘MOSSA’ provides natural, healthy and simple skincare products for active women at the age of 30-40+. It is a simple product range with easily recognisable and wellknown ingredients (berries).

Brand USP

Nature’s most potent ingredients are teamed with extensive research, science, and testing – to obtain the highest quality and effectiveness out of natural plants, to find new highly active local ingredients, and to prove that natural products can be really effective.

It is scientifically proven that berries and fruits grown in Nordic climates contain more concentrated doses of nutritional elements. Therefore it contains healthy, effective ingredients, clear and straightforward product line, simple choices based on colour codes and detailed descriptions.

Target audience

‘MADARA’ customers are intelligent, urban women, who have an acute sense of genuine quality. They choose brands and products that enhance their lives in all aspects – with highest quality, positive image, engaging stories, deep experiences. They appreciate beautiful things that have been made through thought and effort. They appreciate sustainable design and materials.

‘MOSSA’ customers are women aged 30-40+ with an urban lifestyle and average or slightly higher incomes. They are busy, thus choose brands that make their life easier. They want to look good but do not want to spend too much time on it, because life has so much else to offer.

Positioning and price range

‘MADARA’ is positioned at the lower end of premium price segment in most markets. The quality of the products exceeds their price level, making them an attractive choice for consumers. Main products are priced at EUR 15-30. Some of the more advanced product lines (Smart Antioxidants, Time Miracle) and facial oils are priced at EUR 30-50.

‘MOSSA’ is positioned at the middle price range, with a slightly higher price than most competitors in mass market channels, justifying the price with natural, organic ingredients. Main products are priced at EUR 10-20.

Retail channels

‘MADARA’ product are to be offered in premium beauty stores, department stores and small luxury organic shops, including via e‑commerce channels.

‘MOSSA’ products are sold through mass market skincare channels including beauty chain stores like Drogas, hypermarkets and drug stores; but also through premium skincare channels and perfumeries that include lower price products in their assortment.

Competitors

Main competitors to ‘MADARA’ are Lumene, The competitors for ‘MOSSA’ are mass product lines in each respective country, such as Caudalie, Dr. Hauschka and Origins. Lumene, L’Oreal, Nivea, Lavera, etc.

Source: MADARA

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INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Product design and marketing play a very important role in creating brand desirability and demand. All product and communication strategies of MADARA, as well as product designs, graphic designs, retail designs, points-of-sale, and online materials, are created by the Company’s in-house marketing and design team. The existence of a dedicated in-house team for design and marketing ensures better market and trend responsiveness as well as contributes to the continuous and consistent development of the brands. We believe that the in-house creative team is one of the core competitive advantages, enabling MADARA to quickly generate and act on new ideas as market and consumer preferences evolve.

and personal care products importers and wholesalers in Finland. In 2018, Transmeri lifted its ownership in MADARA to 23.09%, essentially becoming a strategic minority shareholder. Transmeri is also a primary reseller of MADARA products in the country. We believe Transmeri has done a good job in engaging its sales channels to promote MADARA’s product portfolio.

Certification and Standards

The Company does not disclose the breakdown of its sales by the EU countries. In its comments, MADARA has stated that regarding the European markets, apart from Latvia and Finland, it focuses mostly on expansion in Germany, Netherlands, UK, Spain, and France. Germany, both the largest cosmetics market in Europe overall and the largest for natural and organic cosmetics, particularly, is a growing and very promising market for the Company. Among MADARA’s primary target markets in Europe are countries with high demand for quality organic products, where people have high disposable incomes and more advanced online shopping habits. Although the competition is rather stiff in most of these markets, rapidly growing demand for natural and organic cosmetics and changing consumer habits are opening up opportunities for different market players.

The Company complies with all necessary regulations of EC No 1223/2009, which controls the cosmetics industry in the European Union. With rising demand among consumers for clear labelling of organic products, several organisations in Europe have created standards for formulating and labelling natural and organic cosmetics. For example, both ‘MADARA’ and ‘MOSSA’ products have been certified under the ECOCERT scheme, which issues ECOCERT and COSMOS certificates. Certification requires that the products are free from genetically modified ingredients, parabens, phenoxyethanol, nanoparticles, silicon, PEG, synthetic perfumes and dyes, and animal-derived ingredients, except those produced naturally, such as milk and honey. It also requires the use of biodegradable or recyclable packaging and sets a range of other compliance criteria. ECOCERT is an organic certification organisation founded in France in 1991 and the very first certification body to develop standards for natural and organic cosmetics. It is based in Europe but conducts inspections in over 80 countries, making it one of the largest organic certification organisations in the world. In addition to its own proprietary standard (ECOCERT), from January 2017, ECOCERT certifies cosmetic formulations according to the COSMOS standard. COSMOS is the first and only pan-European standard for organic and natural cosmetics, created by several associations and organic cosmetics certification bodies.

Main Markets The Company holds a prominent market share in Latvia’s premium skincare segment, where revenues grew at a compounded annual growth rate (“CAGR”) of 23.1% during 2018-2020. It has high brand recognition and consumer loyalty. In 2020, the Company’s net sales in the Latvian market amounted to EUR 4.2m (+36.9% y-o-y), with c.a. 20% of this being generated through its own physical stores. Originally MADARA gained popularity as a local, sustainable skincare manufacturer, but it is now a well-known story of successful Latvian entrepreneurship. Finland is one of the Company’s first and largest export markets, with 2020 net sales in the country of EUR 2.6m, contributing c.a. 23% of the total export sales. The Company’s presence in Finland includes more than 100 retailers and a powerful e-commerce platform. Being one of the most followed beauty brands in Finland and a leading organic beauty brand, MADARA keeps a strong position in the country’s organic cosmetics market. The brand’s story of Arctic and Northern ingredients is well-received among consumers there and gives the brand a local image. In order to strengthen brand recognition and its perception as local, in 2014, the Company started cooperating with a well-known Finnish natural lifestyle advocate, journalist and blogger, Noora Shingler. This cooperation includes regular launches of co-branded products, activities in the media (including social media) and events. Together with Noora Shingler, MADARA has launched several new products in Finland, all of which have been among the bestsellers. MADARA has strong connections with Oy Transmeri Group AB (‘Transmeri’), one of the largest cosmetics

6

INSTITUTIONAL EQUITIES

In Latvia, the Company’s subsidiary Cosmetics Nord SIA has partnered with The Frost Beauty (a brand developed by Monami Frost) and the management indicated that the Company is happy with this partnership.

The Company is also planning to enter Asia-Pacific and Middle East countries, and in fact, it already has a presence in some of them now. The Company has also partnered with The Hut Group, a globally renowned end-to-end tech platform specialising in taking brands direct to consumers worldwide, with a presence in 169 countries. Given the success the Company has achieved through e-commerce channels in the past few quarters, it is strongly focused on expanding the presence of its both brands, i.e. MADARA and MOSSA, into new territories through e-commerce and retail.

Distribution Channels The Company sells its products through various distribution channels, including brand boutiques, online stores, and third-party retailers in over 25 countries. The Company’s brand boutiques, a proven and successful domestic channel, are located in Riga’s leading shopping centres, namely Alfa, Spice, Galerija Centrs, and Akropole. In addition to these stores, the Company has a factory shop at its production facility in Riga. MADARA has worked hard to develop its online distribution network with national online stores. The stores are operated under the ‘madaracosmetics’ domain with many different extensions, such as .com, .lv, .ee, .fi, .de, .lt, .uk, .fr etc. For Germany in particular, the Company established its MADARA Cosmetics GmbH subsidiary in 2016 as additional support for the expansion in Europe’s largest natural and organic cosmetics market. The German subsidiary is acting as the representative of the ‘MADARA’ brand in Germany. The Company’s third-party distribution chain includes conventional and online retailers across 20+ countries. The physical retailers include different department stores, such as Sokos in Finland; Stockmann in Finland, Estonia, and Latvia; Magazine in Denmark; and Ahlens in Sweden. Also, up-market health food stores, such as Basic in Germany, Wholefoods in the United Kingdom, and Rouhonjuuri in Finland as well as niche perfumeries, individual perfumeries, and organic perfumeries, as well as beauty chains with dedicated shopping areas for natural skincare products. Online retailers include several well-respected specialised online shops like lovelula.com, najoba. de, and greenglam.de. Products under the ‘MOSSA’ brand are often sold alongside the ‘MADARA’ brand but are also sold in drugstores such as Drogas, Latvia’s largest pharmacy chain. The Company is in the process of expanding the distribution chain for the MOSSA

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

brand through other pharmacies outside Latvia and similar channels.

COVID-19 Resilience

The Company has recently added two remarkable retail partners. First, a digital consumers brand group, The Hut Group, operating various beauty online retail websites globally (e.g. Lookfantastic, Skinstore) and has a presence in 169 countries. Lookfantastic beauty online store where MADARA’s products are listed is one of the leading online beauty retail stores in Europe. The second partnership is with Douglas for the German market. Douglas is the leading premium beauty platform in Europe, with a 39.9% e-commerce market share in Germany. Considering that Germany is the biggest cosmetics market in Europe, this cooperation is an important step for rapid expansion, sales growth, and brand recognition. These partnerships hold great potential for MADARA’s growth globally with an emphasis on the European market, as such recognised marketplaces will significantly improve MADARA’s brand recognition.

During the COVID-19 pandemic, MADARA has proven itself to be resilient and even strategically growing despite a strong uptrend in COVID-19 infections and related movement restrictions imposed in Latvia and many other EU nations, which led to the temporary store closures and considerable reduction in footfall in physical stores even when stores were reopened. As per the management, this resilience could be attributed to their increased focus on e-commerce with past and ongoing investment in e-commerce infrastructure, the successful market launch of new organic products, and further market penetration in key EU nations like Germany and France through a growing network of physical stores.

7

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Sector Overview According to Cosmetics Europe, in 2020, the region’s retail market for cosmetics and personal care was worth EUR 76.7bn. Collectively, Europe’s market is the largest in the world, with Germany (EUR 14.0bn), France (EUR 11.5bn), the UK (EUR 9.8bn), and Italy (EUR 9.7bn) holding the largest market shares, followed by Spain (EUR 6.4bn) and Poland (EUR 3.8bn).

European Cosmetics and Personal Care Market (EUR bn) Germany 14.0

21.5

France UK 11.5

3.8

Italy Spain

6.4

9.8 9.7

Poland Others

Source: Cosmetics Europe

It is estimated that the cosmetics and personal care industry brings at least EUR 29bn in added value to the European economy annually. About EUR 11bn is contributed directly by the manufacturers of cosmetic products and EUR 18bn indirectly through the supply chain. Including direct, indirect, and induced economic activity, the industry supports over 2 million jobs. In 2020, over 229,400 people were employed directly, and a further 1.69 million indirectly in the cosmetics value chain. The vast majority of Europe’s 500 million consumers use cosmetics and personal care products every day to protect their health, enhance their well-being, and boost their self-esteem. Ranging from antiperspirants, fragrances, makeup, and shampoos, to soaps, sunscreens, and toothpastes, cosmetics play an essential role in all stages of our life and have important functional and emotional benefits. Within the European industry, skincare forms the largest segment, generating about EUR 21.45bn in retail sales in 2020, followed by toiletries (EUR 21.24bn) and hair care products (EUR 14.14bn). Other larger market segments include fragrances/perfumes (EUR 10.49bn) and decorative cosmetics (EUR 9.39bn). Exports of cosmetic products from Europe totalled EUR 22.6bn in terms of trade value during 2020. France and Germany were Europe’s main exporters, together accounting for over 50% of the total global exports from Europe. In terms of intangible asset values, the industry is also vital for Europe, with the region’s leading brands valued at more than EUR 45bn – 26 out of the top 50 global cosmetics brands are European. The cosmetics and personal care industry is a science-driven and highly innovative sector that makes large investments in R&D. In Europe, most of the large-scale companies in the industry spend about 5% of their annual sales on R&D. In 2018, there were at least 77 scientific innovation facilities in Europe that carried out research for cosmetics and personal care industry. Large industry players have multiple research centres that focus on product development, market research, and regulatory compliance. An increasingly visible trend across Europe is towards greater sustainability, with a growing commitment from industry to enable consumers to benefit from products meeting these standards. MADARA is fully committed to the sustainability principle, operating specifically in the segment of natural and organic cosmetics and personal

8

INSTITUTIONAL EQUITIES

care. Organic personal care and cosmetics products are made from plant extracts and natural ingredients that contain minimal or low amounts of synthetic ingredients formulated or manufactured by a chemical process and have chemically altered a substance derived from a naturally occurring plant, mineral, or animal source. These products are widely considered safer and more beneficial than regular personal care and cosmetic products. Government organisations in various countries are encouraging the use of organic ingredients over synthetic ones in cosmetic products, thereby supplementing the market growth. The recent tendency to question the side effects of many substances used in conventional cosmetics, combined with an increasing appreciation of the merits surrounding environmental sustainability, has encouraged many consumers to turn to ‘green’ cosmetics. Such cosmetics products are normally certified by ECOCERT under different certification classes depending on product specifications. Consumers increasingly prefer products labelled as ‘natural’ or ‘organic’ to conventional products. Consumer and retail analysts emphasise that there are three main factors contributing to the growth of the global organic personal care market. These include demand for (a) chemical-free, (b) multifunctional organic products, and (c) new formulations. So where is this demand coming from? Socially conscious consumers are the new driving force behind market trends. Buying ethical goods is now cooler than it has ever been before, particularly as environmental awareness is becoming mainstream in the millennial and Generation Z markets. Social media is key to the shift in consumer demand. Trends are shared more quickly and emotively, with celebrities and influencers — as well as everyday people — posting content that urges everyone to become a conscious consumer. However, it would be a disservice to the intelligence of consumers to claim that the move towards natural products is only due to celebrity influence or peer pressures. Instead, it seems that as the world changes, a new form of consumerism is emerging, based on principles of awareness and caring about people and the planet. Consumers want their purchases to be good for their bodies and good for the world. Natural cosmetics are usually priced higher than their synthetic counterparts. This is because the cost of natural ingredients changes year on year and is directly affected by uncontrollable environmental factors, and the manufacturing process for organic and natural products is more labour-intensive. However, the bigger price tag is not dampening demand. In the haircare market, for example, products containing coconut, marula, argan, and almond oils are gaining traction over products containing harsh chemicals, which are now known to damage hair. In short, increasing interest in beauty and personal care, coupled with growing health awareness, are the key factors propelling the growth of the organic personal care and cosmetic products market. Overall, these factors have fuelled the industry’s strong growth over the last decade and are likely to continue to do so, making natural and organic cosmetics the most dynamic segment of the global personal care market. According to the information available on www. reportlinker.com, the global natural and organic personal care market is estimated at USD 12.7bn in 2020 and is projected to reach USD 23.6bn by 2027. Skincare is projected to record a 10.9% CAGR and reach USD 9.4bn by 2027, while the haircare segment is forecasted to grow at an 8.3% CAGR for the next seven years. In 2020, the US market was estimated at USD 3.4bn, while China is projected to grow at a 16% CAGR to reach USD 6.4bn by 2027. Japan and Canada are projected to grow at a CAGR of 3.4% and 7.6%, respectively, over the 2020-2027 period. Germany is the second larget market in the world and the largest in Europe, with EUR 1.3bn turnover, forecasted to grow at a CAGR of 5.2% during 2020-27, followed by France (EUR 0.8bn). According to another market research provider, Allied Market Research, the global organic personal care and cos-

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

metic products market is expected to garner USD19.8bn by 2022. According to Ecovia Intelligence, the natural and organic cosmetics market in Europe grew c.a. 7% per year from 2013 to 2018, well ahead of the overall cosmetics market. In 2018, the total European market of natural and organic cosmetics reached c.a. EUR 3.8bn, up 7.2% y-o-y. The market volume is expected to reach at least EUR 5bn by 2023, growing at a CAGR of 6.3%. A general consensus among different market research providers is that Asia-Pacific would be the fastest-growing market in the next few years. In terms of sales channels, in Europe, speciality stores dominate the natural and organic cosmetics market. Although their importance is decreasing, they still accounted for 38% of sales in 2018, ahead of pharmacies and drugstores (33%). General retailers accounted for 7% of sales of natural and organic cosmetic products, while other retail channels (perfumery shops, hairdressing salons, beauty salons, online sales, etc.) account for 23% of total sales. Apart from changing consumer preferences, the legislative landscape in Europe can also be a growth driver for natural and organic personal care products. One of the core principles of EU is the sustainable development. European Chemicals Agency operating with REACH regulations is overseeing the goods manufactured and imported in the EU. Furthermore, it evaluates the potential harm of chemicals on human health and the environment. For comparison Annex II, Regulation (EU) 2020/1683 is substantially more comprehensive than the Code of Federal Regulations Title 21, Part 700, Subpart B. Both regulate the prohibited chemical substances in cosmetics. Guided by consumer preferences and growing concern for chemicals in cosmetic products, more and more new natural and organic brands are entering the natural and organic cosmetics or personal care market, including the well-known personal care giants like L´Oreal or Jonson & Jonson. Current strategies employed by large players are new product launches and acquisitions or partnerships with local players. For example, Forest Essential, in December 2020, released an organic makeup line while Garnier launched “Garnier Bio” organic skincare line in cooperation with NGO foundation, GoodPlanet, in 2019. In the past years, it has been proven that product association with well-known figures in society, generally referred to as “influencers”, does create a substantial boost in product performance. The reasons behind that are the increasing penetration of technology and social media, which enables the content to reach billions of people in seconds which is distributed further by viewers. This approach is widely used in the personal care industry. MADARA has also successfully utilised this strategy collaborating with Finnish blogger Noora Shingler, launching custom-made products for the Finnish market, which promoted the MADARA brand substantially and eventually, it has become the third best known organic cosmetics brand in Finland. MADARA plans to benefit from the powerful market trends. Besides its domestic market, Latvia, the Company’s core markets include Northern European countries, where demand is high for quality organic products as people in this region have high disposable incomes and more advanced online shopping habits. This does not in any way preclude efforts in other European countries, though a focus closer to home is natural in the short term, with further opportunities identified over the longer term. One of the main markets for MADARA is Finland, where the trend towards natural beauty and personal care products is becoming more mainstream. The use of natural products first emerged with smaller, organic, and premium brands, though it is now spreading to more widely used products. Natural ingredients have featured in the vast majority of new product launches, including those from leading mass brands, such as Unilever and L’Oréal. Competition is therefore intensifying, with several other international

9

INSTITUTIONAL EQUITIES

best-selling, naturally-positioned brands with innovative ingredients entering the Finnish market in recent years. Skincare, haircare, and makeup are widely using organic care products, collectively accounting for nearly four-fifths of the global organic personal care and cosmetic products market. The cosmetics industry is highly competitive, with the skincare segment set to remain the dominant part, accounting for nearly one-third of the market by 2022. According to many research reports, a larger, ageing population is helping drive growth in this segment, feeding off increased demand for natural and organic anti-ageing creams, moisturisers, and body lotions. Consumers perceive natural and organic products to be safer and of higher quality, with oils from natural sources such as argan, marula, almond, aloe vera, and coconut proving to be particularly popular ingredients for organic skincare products. For a variety of reasons, consumers are seeking ways of embracing a more natural lifestyle, a trend that also applies to cosmetics. Those with the money are moving away from mass-produced items towards those marketed as a part of a healthier, wellness-oriented lifestyle. This is a worldwide trend based on a preference for organic products that have been developed ethically and in an environmentally friendly way through the entire value chain. The visibility given to organic skincare products by the entry of large multinationals into the segment has generated additional demand and accessibility. Therefore, retailers who promote product quality, transparency, and sustainability are doing better than ever. Sustainability as a concept is growing in importance – consumers are becoming more aware of the term and show a preference for products manufactured under its principles: using renewable energy, recyclable packaging, and locally sourced ingredients. In response, the major brands operating in the industry are altering their products mixes, shifting the types of their ingredients used and acquiring natural skincare brands. The main advantages for the larger market players are that they produce natural cosmetics with advanced formulas at a lower cost. However, the higher costs of smaller manufacturers and, therefore, higher prices seem to have relatively little effect on consumer preferences, as they are willing to pay a premium for natural cosmetics. The rise of the individual consumer is an important trend underlying the shift in consumption patterns. After scientific research started highlighting the damage inflicted on the skin by environmental factors (radiation, free radicals and the like), antioxidants were hyped as potential offsets. This gave rise to the trend of using plants that contain very high concentrations of powerful antioxidants in skin creams. The key to success on the market seems to be in combining multiple antioxidants to provide the fullest spectrum of protection possible. Active players in the market invest in research and development to introduce innovative products. These are sold mostly through supermarkets, brand outlets, department stores, drug stores, pharmacies, non-store retail formats, and concept stores. These traditional retail channels still dominate the global cosmetics market. However, increasing rates of internet penetration worldwide, together with ease of availability and attractive discounts, has led to a growing preference of consumers to buy through the online sales channel. This trend should give a further boost to online sales of organic personal care and cosmetic products in the coming years. It is estimated that e-commerce formed 12-13% of the global beauty market in 2018. For many companies, online sales has become the channel of choice, allowing them to increase market penetration, consumer reach, and expand their consumer base. Therefore, while demand for organic cosmetics is growing, the customer’s interaction and experience, using diagnostic tools and digital apps, as well as electronic payments and delivery, are also transforming the industry. For e-commerce sales, retailers must continue to invest in omnichannel presence, bundling together retail, online, and mobile app stores with

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

other methods of engaging with a customer. Several communication channels give the customer the ability to remain in constant contact with a retailer through multiple means. The return on investment generated by more positive customer experiences can be quantified by correlating it with customer loyalty. According to Mordor Intelligence, the COVID-19 pandemic hurts the organic personal care products market in two main ways: 1) by directly affecting production and demand, and 2) by creating supply chain and market disruption, especially for natural ingredients. However, the pandemic has led to an increase in the use of e-commerce. Online distributors are recording an increased interest as home-bound consumers explore retail alternatives. Some personal care product brands and retailers with inventory and shipment operations ready to scale up are reporting e-commerce sales twice as high as their pre-pandemic levels. For instance, Sephora’s US online sales were reportedly up 30% y-o-y in 2020. Similarly, e-commerce technology and digital marketing company ITCAN, has reported that

10

INSTITUTIONAL EQUITIES

online orders for skincare and makeup products in Saudi Arabia has soared up to 700% as consumers sought to avoid public places and online orders for skincare rose by 105.37%, with 32.7 % coming from new users, showing a conversion rate of 63.59%. A similar e-commerce growth trend was observed in the European region. The pandemic accelerated e-commerce meaningfully; the EU-27 retail sales via mail order houses or the internet increased by 30% y-o-y in April 2020, while total retail sales diminished by 17.9% (via OECD). It could be expected that this channel will continue to play a prominent role in the coming years. MADARA has also benefitted a lot from this development in the past few quarters. Furthermore, the pandemic has led to a major consumer shift, as customers are no more brand loyal in developing countries and are trying new brands in the low-stock environment, which has resulted in new opportunities for many private players to emerge in these markets.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


MADARA Cosmetics AS

27th July 2021

Financials

in Latvia. Considering the overall outlook for the sector, especially organic cosmetics, together with continuous developments in the Company’s product range and e-commerce platforms, we believe that MADARA is well-positioned for solid growth going forward.

Revenues MADARA has recorded a significant increase in its revenues over the last few years. During 2016-2020, the total revenues expanded at a CAGR of 28.7% to reach EUR 16.1m last year. Although Latvia remains an important market for the Company, the growth has been primarily boosted by exports to other EU countries. Finland is the Company’s largest export market at this stage and played a significant role in the rapidly growing export volumes of MADARA in recent years, accounting for c.a. 23% of total export sales in 2020. The Company does not disclose the exact breakdown of its sales by export markets. In its comments, MADARA has stated that regarding the EU markets, apart from Latvia and Finland, it focuses mostly on expansion in Germany, Netherlands, UK, Spain, and France. In 2020, all other EU countries (excl. Latvia) formed over 66% of the total revenues, up from 59% in 2015. The management said that the solid growth rates over the past years are achieved mainly due to the steady development of the Company’s existing sales channels and new product launches. The launch of the new organic makeup line in 2019 and further widening of export markets and distribution channels contributed to solid growth in sales volumes. The Company reiterated its target, initially announced in December 2020, to achieve revenues of EUR 27m in 2023. The Company is planning to achieve this target by doubling its production compared to the 2020 level. At the end of last year, work began on preparing the Company for doubling its production capacity. The Company is targeting to improve its organisation, production, and logistics processes, as well as to supplement the technological equipment of production in the existing plant. One of the major positive features of the Company is that its factory is built in a way that the production can be scaled up easily without any substantial investments or fixed costs. The Company estimates that using existing equipment, it has the capacity to double or triple current production volumes by increasing the number of shifts and batch sizes. There is also room to accommodate more equipment, allowing for even greater expansion. Therefore, MADARA’s success depends primarily on strong product developments and its ability to generate sales growth by effectively exploiting all sales channels. Given the favourable market trend for the Company’s natural and organic product offerings, a growing portion of e-commerce sales in revenues, increasing recognition of MADARA brands, new innovative product launches using significant in-house R&D activities, ongoing and future penetration in key markets, and growth potential of organic and natural cosmetics industry in general, we believe the Company can meet this guidance. In terms of markets, we anticipate the sales growth to be driven mainly by export markets in the EU and other countries, with a more modest rise

EURm

Sales Disribution by Brands 100% 80% 60% 40% 20% 0% 2016

2017

MADARA

MOSSA

100% 80%

20%

20

0% 2016

10

Face

Others

2025E

2024E

2023E

2022E

2021E

2020

2019

2018

2017

2016

0

INSTITUTIONAL EQUITIES

Contract Manufacturing

Sales Distribution by Categories

30

Source: MADARA, LHV

2020

MADARA is best known for its face skincare products, as this segment has consistently generated over half of the Company’s revenues. Anti-ageing products category is growing at a slower pace compared to facial skincare, which has more new products that contribute to growth. The body skincare products have retained a steady slice of sales in recent years except 2020. The launch of makeup products in September 2019 affected the breakdown of MADARA’s revenues by product groups significantly in 2020 compared to 2019. By the end of 2019, the makeup line was launched in Latvia, Finland, Germany, and France. The turnover share of other categories decreased due to relatively faster sales growth of facial and makeup categories driven by new product launches.

40%

Latvia

2019

Source: MADARA, LHV

40

Europe, excl. Latvia

2018

60%

Sales Development by Markets

11

Regarding sales by brands, the Company’s exclusive ‘MADARA’ brand generates the majority of revenues. However, of late, ‘MOSSA’ has begun to contribute an increasing share of revenues on account of the ongoing development of the brand and its increased market penetration. The ‘MOSSA’ brand’s future growth is predicated on its affordability and accessibility for the mass market. Nonetheless, we anticipate the ‘MADARA’ brand still to dominate the sales mix in the future, with ‘MOSSA’ potentially contributing up to 15-20% in the longer run.

Anti-age

2017 Body

Hair

2018

2019

Mother & Baby

2020

Make-up

Other

Source: MADARA

Cost Structure The Company’s largest cost items are the cost of goods sold (‘COGS’) and selling expenses. It has been a characteristic for MADARA over the past five years that, as a percentage of sales, the

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

MADARA's Cost Breakdown (2020) Staff 20%

28%

Materials Advertising

7%

Depreciation

5% 3%

Sample production 17.1%

19%

Transport Other

Source: MADARA

Generally high level of selling expenses relates to the fact that the Company in-houses the promotion and marketing of its brands, maintaining control of the whole process. We believe this ensures better market and trend responsiveness as well as contributes to the consistent development of the brands. Looking forward, we would expect material costs and advertising expenses to rise in step with planned sales increases, especially as the Company intends to widen its market presence in both existing and new markets. However, the new efficient factory, along with slower growth in many other expense items compared to the sales dynamics, should help to keep margins relatively strong in the coming years. Thus, MADARA is set to benefit from improving economies of scale.

Profitability MADARA has a solid history of generating profits. The Company has been profitable every year since 2014, from when data is available with us. Moreover, it has managed to increase annual profits every single year. With the expansion and development of the new factory, the Company improved its gross margins from 2017, as the new factory enabled to rapidly increase production volumes and enhance efficiency. Primarily driven by an increase in the proportion of e-commerce sales in total sales, profit margins of the Company reached an all-time high in 2020. The Company generates better profits for the products sold online as the average selling price increases because the Company does not have to pay commissions to distributors. Giv-

12

INSTITUTIONAL EQUITIES

en the expected solid growth rates in sales volumes, improvements in production efficiency, increasing economies of scale, and an increasing proportion of e-commerce sales, we anticipate MADARA to further improve its underlying profit margins going forward.

Gross margin Operating margin (RHS)

2025E

2024E

2023E

10 2022E

14

50 2021E

18

55 2020

22

60

2019

26

65

2018

30

70

2017

34

75

2016

80

%

MADARA's Profit Margins (%)

%

amount of COGS has gradually declined, while the proportion of selling expenses, in turn, has increased. The Company continues to make strong efforts to expand its export markets and improve its e-commerce platform, leading to a substantial boost in selling expenses. Administrative expenses are relatively small and mostly made up of the remuneration of the management. Considering MADARA’s COGS, selling and administrative expenses combined, staff costs constitute the largest individual part in terms of absolute value, amounting to EUR 3.6m in 2020 and forming nearly 28% of the total costs. Naturally, the material costs also form a substantial portion of expenses, though their share in the combined cost structure has somewhat declined over the last few years, accounting for 19.4% in 2020 (EUR 2.5m). Being a relatively new player in the cosmetics sector, MADARA needs to make itself visible, using diversified advertising channels, including different online solutions and social media. Therefore, it is no surprise that advertising expenses form the third-largest individual part of its total costs, which reached an alltime high at 17.1%, as a percentage of revenues, in 2020 (EUR 2.2m), up from 12.8% in 2019, given the focus on improving e-commerce sales. In addition to advertising, the presentation of product samples is an important marketing tool for a cosmetics company, and MADARA has significantly expanded the distribution of samples over the last three years, with the respective costs forming c.a. 5-6% of the total in 2018-2020.

EBITDA margin (RHS) Net margin (RHS)

Source: MADARA, LHV

Non-Current Assets The Company’s production facility is leased from SIA MC Properties on 17th March 2015. MADARA owns a 16,000 sqm plot of land across the road from the new factory, The plot, acquired in two parts during 2017-2018 at the total cost of EUR 0.21m, is considered a longer-term investment, intended for use as the site of new manufacturing and/or warehousing facility. The agreement to lease 2,548 sqm holds until 30th April 2025, with an option to extend for a further ten years. The lessor may only terminate the agreement prematurely in the event of a breach; MADARA has the right to terminate the agreement with three months’ notice. It should also be noted that SIA MC Properties is fully controlled by the founding shareholders of MADARA. That said, the Company has an agreement with SIA MC Properties, in which it has the option to purchase the leased property at a market price at any given time and has the right of first refusal if SIA MC Properties intends to sell it to a third party. The Company owns most of the machinery and equipment in the factory (some of it is leased), giving it full control of the entire production process. At the end of 2020, the total value of the fixed assets was c.a. EUR 2.2m. A certain portion of these fixed assets, in addition to inventory and receivables, are pledged in favour of Swedbank to secure the existing loan and credit line agreements. Considering the nature of the Company’s business, all the usual steps have been taken to secure its intellectual property, in particular its brand name, ‘MADARA’, registering it internationally under the Madrid Protocol. Besides, MADARA has over 20 trademarks registered in Latvia, including its most important brand names and trademarks, ‘MADARA’ and ‘MOSSA’. There are further applications pending. Eventually, protection for the Company’s trademarks will be extended to other countries, based upon the management’s assessment of the necessary scope of protection. However, the Company does not hold any patents, utility models or other similarly registered intellectual property. The cosmetic formulae are not protected by patents due to the complications of obtaining a patent and the high cost of doing so. This is supported by the fact that the Company believes it is not necessary to invest in formal protection, as the nature and content of the products are driven by the unique combination of ingredients and production machinery, making them hard to copy without replicating the exact sourcing and manufacturing conditions.

Investments During 2018-19, MADARA made long-term investments in the amount of over EUR 1.1m annually; however, it declined to EUR 0.7m in 2020,

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


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MADARA Cosmetics AS

about half of which was invested in the production facility. In 2019, the Company invested c.a. EUR 1.2m, of which about EUR 0.6m was directed into the improvement of production processes. One of the most significant projects of MADARA last year was the development of a new makeup line. Total long-term investment in the makeup development project was nearly EUR 0.5m, including EUR 0.1m development expenses and EUR 0.4m investments into makeup production equipment. During the development phase, MADARA upgraded its production facilities with two new production machines – a reactor for highly pigmented formulations and an automatic makeup filling and capping machine. Apart from the makeup line developments, the Company made investments in several departments for further improvement and automation of processes. Such projects included the implementation of the Business Intelligence tool to improve supply chain management and data analytics; an advanced process of developing new products; and the implementation of a production resource planning system that will allow more efficient planning and utilisation of the existing production resources. In 2018, larger investments of the Company included two new filling and packaging lines, one for automated filling of tubes and the other for automated filling and sealing of vials. Also, MADARA invested in the development of an e-commerce system as well as the implementation of IT projects to automate various business processes. Regarding the new factory, it was the largest single development project during 2014-2016, with a total investment of c.a. EUR 1.3m. The majority of this investment was made in 2015, with about EUR 0.2m spent in 2016, mostly considered as maintenance capex. As part of the development of the new factory, the Company purchased machinery and equipment, including an automated filling and sealing production line, six tanks for the storage of cosmetic products, a vacuum processing unit, a steam generator, and a water preparation plant. This was all co-financed by Swedbank and the Investment and Development Agency of Latvia (LIAA). Additionally, from 2015 to 2017, the Company purchased an electric forklift, an automatic labelling machine, and a vertical cartoning machine under other leasing agreements with Swedbank. Looking ahead, the Company intends to continue investing in expanding its international reach, mainly through the growth of ecommerce. Investments made over the past few years significantly increased the overall production capacity of the Company, and according to the management estimates, the production volume can be easily doubled with the current capacity. The management indicated that the capex would remain below EUR 1m in 2021 but might remain in a EUR 1-2m range afterwards. In 2021, the Company has plans to invest in packaging machinery for tubes, bottles, and sachets, as well as a mixing unit. Going forward, the Company may invest in new production equipment, depending on the level of growth achieved. Additionally, it does not exclude the possibility of expanding its product or service segments and will invest accordingly. In

MADARA's Capex

our projections, we assumed that MADARA would continue to invest in product developments and specific new production equipment. Therefore, we projected the Company’s total capex to expand further in the coming years, with the average capex reaching EUR 1.3m per year during our forecast period.

Debt Position Since the successful IPO concluded in November 2017, the Company has been strongly capitalised and used very little debt to finance its growth in the following years. MADARA raised EUR 3.3m of gross new equity from the IPO, priced at EUR 6.25 per share. At the end of 2020, the Company had total debt of only EUR 0.09m, out of which EUR 0.08m is related to finance lease liabilities, while its cash and cash equivalents position amounted to EUR 5.6m. As of 2020, a small loan agreement was outstanding with Swedbank, with maturity in January 2021, and the interest rate of 3m Euribor +3.3%. Additionally, it should be noted that the Company acts as a guarantor for the MC Properties SIA borrowings from Swedbank, related to the building the Company operates. The property is pledged in favour of Swedbank. The amount of MADARA’s guarantee is the amount of the outstanding liabilities of MC Properties SIA against Swedbank, standing at EUR 0.6m at the end of 2019. During 2017-19, MADARA invested a certain part of its free cash into short-term financial securities with a fixed interest rate of 12%. Such investments amounted to EUR 0.95m at the end of 2019, but the management claims that the Company sold all its short-term investments profitably in 2020.

Dividends Given the strong financial position of the Company, MADARA has been able to pay a growing amount of dividends each year since 2016, despite its vigorous growth profile. In 2021, the Company paid a dividend of EUR 0.40 per share, distributing a total of EUR 1.51m from the profits of 2020, which would correspond to a payout ratio of 43.8%. During 2016-2020, the payout ratios have ranged from 25% to 36%. We believe that the Company will continue to gradually increase its dividend payments in the coming years, lifting the payout ratio to at least 50% by 2022. With its net cash position positive, the Company is in a strong position to ensure that it can capitalise on all expansion, development, and investment opportunities that arise without adding financial stress to the business. It should be kept in mind that, from the beginning of 2018, Latvian corporate income tax (‘CIT’) regulations became similar to those effective in Estonia. Legal entities are not paying income tax on earned profits, while tax is instead paid on distributed profits. The profit distributions are subject to a tax rate of 20% of their gross amount, or 20/80 of net dividends. CIT on dividends is recognised in the income statement for the reporting period that the respective dividends are declared. Certain tax exceptions are allowed in case the dividend is paid from profits earned before 2018, already taxed with CIT. We assume MADARA would pay the full tax amount on the dividend payments starting from 2021.

Source: MADARA, LHV

INSTITUTIONAL EQUITIES

Dividends (EURm) Source: MADARA, LHV

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

2025E

2024E

2023E

2022E

0 2021E

0 2020

20

2019

2

2025E

2024E

2023E

2022E

2021E

2020

2019

2018

2017

2016

0.0

13

40

2016

0.4

4

2018

0.8

60

2017

1.2

EURm

EURm

1.6

6

Pay-out ratio (%, RHS)

%

MADARA's Dividends and Payout Ratio

2.0


27th July 2021

MADARA Cosmetics AS

Valuation In this section, we discuss our assumptions and approach in deriving the fair equity value range for the Company. As per our usual practice, we are following two main valuation methods: 1) an income approach, mainly grounded on a value derived from the DCF calculations, and 2) a market approach, using guideline public companies method (‘GPCM’), looking at multiples of a peer group of comparable listed companies. We acknowledge that, similar to other cosmetics companies, apart from the cash flow generation capabilities, a substantial portion of MADARA’s equity value is driven by its intellectual property, which mostly comprises the value of the brands and trademarks, developed product formulations and production methods. However, it is complicated to put a price tag on the intellectual property of MADARA separately or as a component for the sum-ofthe-parts (‘SOTP’) analysis. Nonetheless, we believe that MADARA’s balance sheet significantly undervalues the potential current market value of its intellectual properties, with total intangible assets standing at only EUR 0.7m at the end of 2020. On the other hand, in our view, the intellectual property value of global cosmetics companies should be reflected in their market multiples, which are notably above the broader market averages. For example, the selected peer companies of MADARA are trading at 2021E median P/E and EV/EBITDA ratios of c.a. 46.7x and 21.5x, respectively. Therefore, our peer analysis for the Company partially counts for the additional value arising from the brands and product formulas. In addition, we believe that there is further investor value from an ESG perspective. ESG investments are becoming increasingly valuable, with ESG indices historically outperforming standard indices. It has also been proven that, within the Baltics, Global Compact signatories have in the past outperformed non-signatories. Considering the nature of MADARA’s business, we believe that it would be well-placed within the scope of an ESG company screen. This, as explained below, should support an added qualitative touch to our view of the Company.

ESG Considerations ESG relates to identifying and reducing risks associated with the environment, social issues, and corporate governance. The market for ESG investing has thrived over the past two decades, with these factors playing an increasing role in determining the long-term value and performance of a company. According to NASDAQ, while ESG factors are not directly financial in nature, it believes that ESG information is no less relevant or useful to an investor in assessing the financial prospects and operational performance of a company than traditional accounting information. This has been verified in a range of studies that have shown a distinct correlation between companies with good ESG practices and a lower cost of capital, reduced stock price volatility, and better valuation over the long term. According to several reports, globally, ESG investing has more than doubled over the past 20 years, with the cumulative value increasing from tens of billions to hundreds of trillions and the number of investment funds rising from 10s to 1,000s. These fund numbers are likely to continue rising in the future, as investors perceive that businesses that act in a sustainable manner are likely to be more profitable over time and should deliver better returns to shareholders. Besides clearly placing MADARA within the ESG investment universe, there are some other benefits the Company’s policies can generate. From one perspective, companies with good ESG policies and metrics have the potential for lower discount rates. It is becoming increasingly mainstream to perceive a company with good ESG

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INSTITUTIONAL EQUITIES

metrics as carrying lower risks. However, there is no real consensus on the degree of ‘rewarding’ a company for good ESG practices, and this is still susceptible to subjectivity. Likewise, the ESG consideration can be taken into account directly as part of the DCF in terms of future cash flow liabilities. However, based on the Company’s reports, it seems unlikely that it faces any significant costs directly related to any ESG matters. As such, there is no need to penalise the valuation for any adverse future ESG-related events. The other means of accounting for a company’s level of ESG responsibility is adjusting the peer multiples when determining a peer implied value. Once again, though, this can be highly subjective in terms of what may or may not be reasonable for an ESG adjustment. Key ESG considerations for MADARA: • The Company has been named the No.1 greenest and most sus-

tainable enterprise in Latvia by Green Dot three times. • The Company manufactures certified organic and natural skin-

care products, using organic and natural raw materials, recyclable or post-consumer recycled packaging, processing and manufacturing techniques that are clean and respectful of human health and the environment. • The products are certified by ECOCERT according to the inter-

national ECOCERT/COSMOS standards. • The Company’s production process and other processes and

activities are energy efficient to minimise the impact on both the environment and the Company’s financial performance. • The Company’s social responsibility is based on four founda-

tional pillars, namely (1) reduction of health risk by using only organic and natural products; (2) promoting openness and equality within the workplace; (3) all manufacturing is done locally in fair and safe work conditions; and (4) the Company works with organisations against inequality, discrimination, and abuse. • The workforce health and safety policy is in line with Latvian leg-

islation. • The Company has strict governance policies in place.

Taking these various factors about the Company into consideration, we believe that it should rank strongly in terms of ESG policies and reporting, and must be considered as part of the ESG investment world.

Discounted Cash Flow The free cash flow to the firm (‘FCFF’) is calculated as the tax-adjusted operating profit, adjusted for capex, working capital investments, and depreciation and amortisation. Main assumptions for the cost of the long-term risk-free rate, sector betas, and equity risk premium, are sourced from the “2017 Valuation Handbook – International Industry Cost of Capital” published by Duff & Phelps. The country risk premium is based on a ratings-based default spread sourced from the Damodaran database. Also, the additional size premium and company-specific risk premium are applied to capture more specific size, liquidity, or operational aspects. Below are the main assumptions used for the DCF: • DCF model – We have used a three-step DCF model, which

includes a five-year forecast period, followed by the three-year transition period when all elements of the Company’s cash flow gradually approach those applied for the terminal period. • Risk-free rate – We used a risk-free rate of 2.5% based on a

normalised long-term forecast. • Market risk premium – We considered our standard long-term

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MADARA Cosmetics AS

normalised equity risk premium of 5.1% in our calculations.

• Tax rate – Starting from 2018, Latvian corporate taxation has

been changed, and instead of profits, only profit distributions (such as dividends) are taxed. Therefore, we did not use effective tax rate, but calculated expected tax costs based on estimated dividends during the forecast period.

• Levered beta – We used the household and personal products

sector median unlevered Vasicek Adjusted five-year beta of 0.75 to calculate levered beta of 0.79 for MADARA, based on a debtto-equity ratio of 0.05x and a tax rate of 0%.

• Terminal growth – We assumed a conservative stable growth

• Company-specific risk premium – To capture size premium

rate of 3.0% for the terminal growth.

and other risks like earnings volatility, execution risk, and other operational risks, we have used a company-specific risk premium of 3.5%.

Based on these assumptions, we calculated a DCF-based value of MADARA’s total equity of EUR 86.0m or EUR 22.82 per share. We have conducted a sensitivity analysis to assess the impact of changes in terminal growth and WACC on the DCF value per share, summarised in the following table.

• Cost of debt – An estimated long-term average of 2.0% was

used as an effective interest rate. DCF Assumptions:

Sensitivity of DCF value to changes in assumptions (EUR)

Risk free rate

2.50%

Market risk premium

5.10%

Country risk premium

1.2%

Company specific risk premium

3.5%

Share of debt

5.0%

Tax rate

0.0%

Cost of equity Cost of debt

11.2% 2.0%

WACC

9.2%

9.7%

10.2%

10.7%

11.2%

11.7%

12.2%

2.1%

25.44

23.82

22.41

21.16

20.05

19.06

18.16

2.4%

26.24

24.51

23.00

21.67

20.50

19.45

18.51

2.7%

27.12

25.25

23.64

22.22

20.98

19.87

18.88

3.0%

28.08

26.06

24.33

22.82

21.49

20.32

19.27

3.3%

29.14

26.95

25.07

23.46

22.04

20.80

19.69

3.6%

30.31

27.92

25.89

24.15

22.64

21.31

20.14

3.9%

31.61

28.99

26.79

24.90

23.28

21.87

20.62

0.79

Terminal growth rate

Levered beta

WACC

10.7%

Source: LHV

Source: LHV

DCF valuation, EURm

2021E

2022E

2023E

2024E

2025E

EBIT

4.9

6.0

7.1

8.0

9.2

Taxes

(0.4)

(0.6)

(0.7)

(0.8)

(0.8)

0.7

0.7

0.8

0.9

1.0

Capex

(0.8)

(1.2)

(1.4)

(1.5)

(1.6)

Change in NWC

(0.4)

(0.6)

(0.4)

(0.4)

(0.4)

FCFF

4.1

4.3

5.4

6.2

7.3

Discounted FCFF

3.9

3.7

4.2

4.4

4.6

Non-cash charges

EV

Term

59.7 80.4

Net debt + adjustments

5.6

Equity value

86.0

Equity value per share (EUR)

22.8

Source: LHV

Peer Valuation For the peer valuation, we selected 23 listed cosmetics companies and bifurcated them in two groups based on the size and similarity of their business model with MADARA. Many of these peers have ECOCERT certification. For example, Midsona’s subsidiary Urtekram International A/S has this certification while BWX’s Nourished Life brand is certified by ECOCERT. Similarly, L’Occitane’s Melvita brand and some products of L’Oreal are certified by ECOCERT while NIVEA WonderBARs and MagicBARs from Beiersdorf AG have ECOCERT certification.

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INSTITUTIONAL EQUITIES

We acknowledge that all the peers are significantly larger than MADARA, with a global footprint and well-established brand names. Thus, we believe a considerable discount is required for MADARA from the peer multiples. However, MADARA has its own qualities, potentially reducing the relative valuation gap, such as strong growth characteristics, good brand recognition in its home region, as well as ESG considerations. Still, we decided to apply a conservative 5% discount relative to the median multiple of Group 1 peers and 30% to Group 2 peers’ median multiple. In calculating a peer implied fair val-

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27th July 2021

MADARA Cosmetics AS ue range, we multiplied the median multiples of P/E and EV/EBITDA ratios with our net profits and EBITDA expectations for 2021-2023, respectively. We gave 25% weight to value derived from Group 1 peers’ median multiple and 75% weight to value derived from Group Company

2 peers’ median multiples. As can be observed from the table, the peer comparison ended up with a broad spectrum of values, ranging from EUR 21.2-40.6 per share. EV/EBITDA (x)

P/E (x)

Bloomberg ticker

Market Cap EURm

2021E

2022E

2023E

2021E

2022E

2023E

078520 KS Equity

194

-

-

-

-

-

-

Group 1 ABLE C&C BIOERA MIDSONA AB-B SHS ASIAN PHYTOCEUTICALS PCL

BIE IM Equity

3

-

-

-

-

-

-

MSONB SS Equity

465

13.7

12.5

11.7

19.3

16.9

15.5

APCO TB Equity

103

-

-

-

-

-

-

BWX AU Equity

451

20.0

15.1

11.6

41.3

28.7

21.0

BWX LTD CREIGHTONS PLC

CRL LN Equity

60

-

-

-

-

-

-

L'OCCITANE INTERNATIONAL SA

973 HK Equity

4,765

17.9

13.0

11.4

41.9

25.4

21.2

GLC PW Equity

73

-

-

-

-

-

-

GLOBAL COSMED SA HANKOOK COSMETICS CO LTD

123690 KS Equity

136

-

-

-

-

-

-

J.L. MORISON (INDIA) LTD

JLM IN Equity

30

-

-

-

-

-

-

NATURAL BEAUTY BIO-TECH

157 HK Equity

148

-

-

-

-

-

-

NNH SS Equity

49

-

-

-

-

-

-

NEW NORDIC HEALTHBRANDS AB Median

17.9

13.0

11.6

41.3

25.4

21.0

Average

17.2

13.5

11.6

34.2

23.7

19.2

Quartile 1

15.8

12.7

11.5

30.3

21.1

18.2

18.9

14.1

11.7

41.6

27.1

21.1

Quartile 3 Weight applied to Group 1 multiples

25%

Company size discount applied to Group 1 peers

5%

Group 2 L'OREAL

OR FP Equity

210,028

25.9

23.9

22.7

45.2

41.1

38.0

ESTEE LAUDER COMPANIES-CL A

EL US Equity

99,595

32.2

27.4

24.3

52.5

45.2

39.4

4452 JT Equity

24,740

12.5

11.6

11.0

25.0

22.5

20.5

KAO CORP BEIERSDORF AG

BEI GY Equity

25,729

17.0

15.9

14.8

34.2

31.2

28.5

090430 KS Equity

10,607

15.3

13.5

12.2

42.7

33.4

27.4

COTY US Equity

5,475

17.1

14.7

13.5

105.5

37.7

31.0

SHISEIDO CO LTD

4911 JT Equity

23,737

29.5

20.1

16.0

91.2

53.1

36.0

KOSE CORP

4922 JT Equity

8,154

35.0

21.8

19.8

63.8

39.1

34.7

POLA ORBIS HOLDINGS INC

4927 JT Equity

5,122

20.8

17.2

14.7

52.6

39.0

31.6

ELF BEAUTY INC

ELF US Equity

1,125

23.3

21.1

18.5

39.5

38.0

32.6

EMAMI LTD

HMN IN Equity

2,819

AMOREPACIFIC CORP COTY INC-CL A

27.1

25.7

23.2

41.6

35.6

30.8

Median

23.3

13.0

11.6

41.3

25.4

21.0

Average

23.2

13.5

11.6

34.2

23.7

19.2

Quartile 1

15.8

12.7

11.5

30.3

21.1

18.2

18.9

14.1

11.7

41.6

27.1

21.1

40%

30%

30%

40%

30%

30%

5.6

6.7

7.9

4.6

5.4

6.4

Implied equity value based on disc. median multiple (EURm)

79.9

81.9

88.1

153.1

140.2

136.0

Implied equity value per share

21.2

21.7

23.4

40.6

37.2

36.1

Quartile 3 Weight applied to Group 2 multiples

75%

Company size discount applied to Group 2 peers

30%

Weight applied to different periods Respective financials for MADARA (EURm)

Source: Bloomberg, LHV

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INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


MADARA Cosmetics AS

27th July 2021

Valuation Summary

perience, in our view, the accumulated intellectual property, including the value of its brands and trademarks, product formulae, and production specifications, play an important role in the whole value creation process of MADARA, although the Company’s intangibles are difficult to quantify at this stage.

Finally, in valuing the equity share of MADARA, we have used the weighted average of values derived from the DCF and the peer group multiples (P/E, EV/EBITDA), applying different weights to each method. Regarding the peer multiples for different years, we applied a time weighting to the implied values, assigning the weight of 40% to 2021 and 30% each to 2022 and 2023 values. As the peer group companies are much larger than MADARA, we see the DCF as a more appropriate valuation method for the Company. We have given the DCF valuation a 70% weight in the total value, leaving the peer valuation weight at 30%, including a 15% weight to each of the multiples. Overall, based on our current projections for MADARA and other assumptions, we decided to significantly increase our fair value range for the stock from the previous EUR 8.60-9.40 to EUR 23.8026.30 per share.

Considering the ongoing COVID-19 pandemic, given the relatively large and growing portion of e-store sales in its revenue mix, we believe the Company proves more resilient throughout this crisis compared to many other discretionary consumer stories. Also, its performance could be further backed by the ‘lipstick effect’, stating that consumers tend to prefer less costly beauty and luxury goods during uncertain times.

Key Risks Competition Risk: The Company operates in a highly competitive innovation-driven industry with relatively few entry barriers. With the increasing popularity of e-commerce, other companies can easily utilise online distribution channels and introduce new products in the same markets where MADARA operates.

In sum, MADARA is well-positioned to become a leading European brand in natural and organic cosmetics. The Company’s underlying strengths include developing its own unique cosmetics and skincare formulae, its ECOCERT certification, and its in-house design and PR agency. The scalability of the production capacities is another strength of MADARA. According to the management estimates, the production volume could easily be doubled or even tripled with the existing capacity, without any substantial capex, by increasing the number of shifts and batch sizes. Thus, with the right marketing tools and some luck, MADARA is capable of recording much faster growth rates in sales than currently projected, further capitalising on the economies of scale. The Company already enjoys strong brand recognition in the Baltic and Nordic regions, with a solid track record in developing and introducing new products to the market. As such, we believe it can capitalise on that base, increasing its share in existing markets and penetrating new ones. With nearly 15 years of ex-

Weighted Value Per Share, EUR Method

Consumer Preference Risk: This industry is subject to rapid changes in consumer preferences. So MADARA needs to quickly identify and adapt to consumer preferences and trends in the industry. Product Safety and Liability Risk: The Company could face a product liability claim if any of its products cause adverse effects on a consumer. Regulatory Risk: The companies operating in the cosmetics and personal care industry must adhere to strict environmental regulations affecting their production, distribution, research, and general administration.

Period weights 2021E

2022E

2023E

Period weighted value

Weights

Contribution to value

15%

3.3

40%

30%

30%

EV/EBITDA

21.2

21.7

23.4

22.0

P/E

40.6

37.2

36.1

38.2

15%

5.7

22.8

70%

16.0

DCF Total weighted value per share

25.0

Source: LHV

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INSTITUTIONAL EQUITIES

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27th July 2021

MADARA Cosmetics AS

Financial Tables Income Statement (EURm) Revenues Production costs

2016

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

5.86

7.40

9.53

11.55

16.07

20.35

24.12

27.02

29.68

32.48

(2.54)

(2.75)

(3.48)

(4.46)

(5.22)

(5.49)

(6.51)

(7.16)

(7.72)

(8.28)

Gross profit

3.32

4.65

6.05

7.08

10.86

14.85

17.61

19.86

21.97

24.20

Sales costs

(1.86)

(2.32)

(3.55)

(4.50)

(6.29)

(8.54)

(10.01)

(11.08)

(12.02)

(12.99)

Administrative costs

(0.60)

(1.08)

(1.12)

(1.29)

(1.22)

(1.63)

(1.93)

(2.09)

(2.30)

(2.44)

0.13

0.19

0.17

0.26

0.44

0.55

0.63

0.69

0.73

0.76

(0.05)

(0.08)

(0.07)

(0.08)

(0.25)

(0.30)

(0.31)

(0.33)

(0.34)

(0.36)

Operating profit

0.93

1.35

1.47

1.48

3.53

4.93

5.99

7.05

8.03

9.17

Depreciation & Amortization

0.39

0.42

0.52

0.71

0.73

0.69

0.70

0.81

0.92

1.04

Other operating income Other operating costs

EBITDA

1.32

1.77

1.99

2.18

4.27

5.62

6.68

7.86

8.95

10.22

Financial income

0.00

0.00

0.06

0.11

0.06

0.01

0.02

0.02

0.03

0.03

(0.02)

(0.03)

(0.02)

(0.02)

(0.03)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

0.91

1.33

1.52

1.56

3.56

4.94

6.00

7.07

8.05

9.20

Income tax

(0.10)

(0.16)

(0.00)

-

(0.12)

(0.38)

(0.57)

(0.68)

(0.80)

(0.85)

Deferred income tax

(0.01)

0.07

-

-

-

-

-

-

-

-

0.80

1.25

1.52

1.56

3.45

4.56

5.43

6.39

7.25

8.36

Financial expenses Pre-tax profit

Net profit Nr of shares (m)

1.07

3.75

3.75

3.75

3.77

3.77

3.77

3.77

3.77

3.77

EPS

0.75

0.33

0.40

0.42

0.91

1.21

1.44

1.70

1.92

2.22

Dividends paid

0.12

0.20

0.34

0.45

0.56

1.51

2.28

2.72

3.20

3.39

DPS

0.11

0.05

0.09

0.12

0.15

0.40

0.61

0.72

0.85

0.90

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

Source: MADARA for historicals, LHV for estimates

Balance Sheet (EURm)

2016

Assets Intangible assets

0.01

0.14

0.38

0.68

0.67

0.70

0.82

0.94

1.07

1.20

Fixed assets

1.59

1.66

2.06

2.24

2.25

2.34

2.73

3.15

3.58

4.03

Long term financial assets

0.04

0.04

0.04

0.07

0.07

0.07

0.07

0.07

0.07

0.07

Total non-current assets

1.64

1.84

2.48

2.99

2.98

3.10

3.61

4.16

4.72

5.30

Inventory

1.29

1.63

2.09

2.98

4.22

3.93

4.32

4.56

4.82

5.06

Total receivables

0.99

1.06

1.15

1.78

1.33

2.01

2.36

2.63

2.88

3.15

Trade receivables

0.90

0.92

0.99

1.35

1.21

1.89

2.24

2.51

2.76

3.02

Amounts owed by public debts

0.04

-

-

-

-

-

-

-

-

-

Other receivables

0.03

0.10

0.11

0.37

0.09

0.09

0.09

0.09

0.09

0.09

Deferred expenses

0.02

0.03

0.05

0.06

0.04

0.04

0.04

0.04

0.04

0.04

-

0.50

0.70

0.95

-

-

-

-

-

-

Cash and cash equivalents

0.58

4.09

3.43

2.33

5.65

8.35

10.54

13.35

16.52

20.58

Total current assets

2.85

7.28

7.36

8.04

11.20

14.29

17.21

20.55

24.22

28.79

Total assets

4.49

9.12

9.85

11.03

14.19

17.40

20.83

24.70

28.94

34.09

Share capital

0.11

0.37

0.37

0.37

0.38

0.38

0.38

0.38

0.38

0.38

Share premium

0.76

4.02

4.02

4.02

4.02

4.02

4.02

4.02

4.02

4.02

Other reserves

-

-

-

-

-

-

-

-

-

-

Short-term fin. Investments

Equity and Liabilities Equity

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27th July 2021

MADARA Cosmetics AS

Balance Sheet (EURm)...continued

2016

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

Retained earnings

1.22

1.61

2.52

3.58

4.58

6.52

8.80

11.52

14.71

11.33

Net profit for the period

0.80

1.25

1.52

1.56

3.45

4.56

5.43

6.39

7.25

15.61

Total equity

2.89

7.25

8.43

9.55

12.43

15.48

18.63

22.31

26.37

31.33

Liabilities Bank Borrowings

0.38

0.24

0.11

0.01

-

-

-

-

-

-

Other liabilities

0.05

0.18

0.14

0.08

0.03

0.03

0.03

0.03

0.03

0.03

Deferred income-Current

0.23

0.15

0.06

-

-

-

-

-

-

-

Deferred tax liabilities

0.07

-

-

-

-

-

-

-

-

-

Total non-current liabilities

0.74

0.57

0.31

0.09

0.03

0.03

0.03

0.03

0.03

0.03

Bank Borrowings

0.14

0.14

0.14

0.10

0.01

-

-

-

-

-

Advances from customers

0.03

0.08

0.02

0.05

0.08

0.10

0.12

0.14

0.15

0.16

Trade payables

0.25

0.54

0.36

0.50

0.63

0.65

0.78

0.85

0.92

0.99

-

-

-

-

-

-

-

-

-

-

0.11

0.12

0.10

0.15

0.16

0.16

0.16

0.16

0.16

0.16

Related party debt State social insurance contributions Other liabilities

0.11

0.16

0.18

0.21

0.25

0.31

0.36

0.40

0.43

0.47

Deferred income

0.09

0.09

0.09

0.06

-

0.02

0.02

0.03

0.03

0.03

Unpaid previous year dividend

-

-

-

-

-

-

-

-

-

-

Accrued liabilities

0.14

0.17

0.21

0.32

0.61

0.64

0.72

0.79

0.85

0.92

Total current liabilities

0.86

1.29

1.11

1.39

1.73

1.88

2.17

2.36

2.55

2.73

Total liabilities

1.61

1.87

1.41

1.48

1.76

1.91

2.19

2.39

2.57

2.76

Total equity and liabilities

4.49

9.12

9.85

11.03

14.19

17.40

20.83

24.70

28.94

34.09

2016

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

Source: MADARA for historicals, LHV for estimates

Cash Flow Statement (EURm) Operating Activities Net profit

0.91

1.33

1.52

1.56

3.56

4.94

6.00

7.07

8.05

9.20

0.38

0.41

0.46

0.61

0.55

0.69

0.70

0.81

0.92

1.04

Other non-cash adjustments

(0.12)

(0.34)

(0.27)

(0.25)

(0.26)

(0.37)

(0.58)

(0.70)

(0.82)

(0.88)

Net change in working capital

(0.57)

0.06

(0.64)

(0.89)

(0.54)

(0.24)

(0.46)

(0.32)

(0.33)

(0.33)

0.61

1.46

1.07

1.03

3.30

5.02

5.66

6.86

7.83

9.04

Depreciation and amortisation

Net operating cash flow Investing Activities Purchase of PPE and intangibles

(0.11)

(0.44)

(1.14)

(1.19)

(0.73)

(0.81)

(1.21)

(1.35)

(1.48)

(1.62)

Net change in financial investments

(0.00)

(0.50)

(0.20)

(0.50)

1.20

-

-

-

-

-

Other

0.00

0.00

0.06

0.09

0.06

0.01

0.02

0.02

0.03

0.03

(0.12)

(0.94)

(1.28)

(1.60)

0.53

(0.80)

(1.19)

(1.33)

(1.46)

(1.59)

Net proceeds/redemtion of debt and leases

(0.14)

(0.22)

(0.19)

(0.19)

(0.16)

(0.01)

-

-

-

-

Dividends paid

(0.12)

(0.20)

(0.34)

(0.45)

(0.56)

(1.51)

(2.28)

(2.72)

(3.20)

(3.39)

-

3.32

-

-

-

-

-

-

-

-

Net investing cash flow Financing Activities

Change in capital Net other financing items

(0.02)

0.09

0.08

0.11

0.21

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

Net financing cash flow

(0.28)

2.99

(0.45)

(0.53)

(0.51)

(1.52)

(2.28)

(2.72)

(3.20)

(3.39)

Total change in cash

0.22

3.51

(0.66)

(1.10)

3.32

2.71

2.18

2.82

3.17

4.06

Cash and cash equivalents at beginning of the year

0.36

0.58

4.09

3.43

2.33

5.65

8.35

10.54

13.35

16.52

Cash and cash equivalents at end of the year

0.58

4.09

3.43

2.33

5.65

8.35

10.54

13.35

16.52

20.58

Source: MADARA for historicals, LHV for estimates

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TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Main Ratios

2016

2017

2018

2019

Sales growth

39.7

26.3

28.7

21.2

Gross profit growth

39.6

40.1

30.1

17.1

2020

2021E

2022E

2023E

2024E

2025E

39.2

26.6

18.6

12.0

9.9

9.4

53.3

36.8

18.6

12.8

10.6

10.2

Growth, %

EBITDA growth

96.1

33.5

12.9

9.4

95.4

31.8

18.8

17.6

13.9

14.1

Operating profit growth

82.0

44.6

9.1

0.1

139.5

39.5

21.4

17.8

13.8

14.3

Net profit growth

79.3

55.2

21.7

3.1

120.4

32.5

19.0

17.7

13.4

15.2

Gross margin

56.7

62.9

63.5

61.4

67.5

73.0

73.0

73.5

74.0

74.5

EBITDA margin

22.6

23.9

20.9

18.9

26.5

27.6

27.7

29.1

30.2

31.5

Operating margin

15.9

18.3

15.5

12.8

22.0

24.2

24.8

26.1

27.0

28.2

Net margin

13.7

16.8

15.9

13.5

21.4

22.4

22.5

23.7

24.4

25.7 31.4

Margins and profitability, %

Return Ratios 3.5

7.9

8.9

9.8

12.5

15.6

18.7

22.4

26.4

ROCE (%)

Capital Employed (EUR m)

29.3

23.8

17.6

15.8

31.7

35.1

34.9

34.3

32.9

31.7

ROE (%)

31.5

24.6

19.3

17.4

31.4

32.7

31.8

31.2

29.8

29.0

ROA (%)

19.2

18.3

16.0

15.0

27.3

28.9

28.4

28.1

27.0

26.5

Leverage Debt (EURm)

0.59

0.62

0.44

0.25

0.09

0.08

0.08

0.08

0.08

0.08

Debt/Equity ratio (x)

0.2

0.1

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net debt (EURm)

0.0

(4.0)

(3.7)

(3.0)

(5.6)

(8.3)

(10.5)

(13.3)

(16.4)

(20.5)

Net gearing (x)

0.0

(0.5)

(0.4)

(0.3)

(0.4)

(0.5)

(0.6)

(0.6)

(0.6)

(0.7)

Net debt/EBITDA (x)

0.0

(2.2)

(1.8)

(1.4)

(1.3)

(1.5)

(1.6)

(1.7)

(1.8)

(2.0)

3.75

3.75

3.75

3.77

3.77

3.77

3.77

3.77

3.77

Valuation Shares O/s (m) Share Price (EUR)

7.50

7.95

7.85

19.80

29.00

29.00

29.00

29.00

29.00

Mkt. Cap (EUR m)

28.1

29.8

29.4

74.6

109.3

109.3

109.3

109.3

109.3

Enterprise Value (EUR m)

103.7

24.1

26.1

26.4

69.1

103.7

103.7

103.7

103.7

EV/Revenue (x)

3.3

2.7

2.3

4.3

5.1

4.3

3.8

3.5

3.2

EV/EBITDA (x)

13.6

13.1

12.1

16.2

18.4

15.5

13.2

11.6

10.2

P/E (x)

22.5

19.6

18.8

21.7

24.0

20.1

17.1

15.1

13.1

P/BV (x)

3.9

3.5

3.1

6.0

7.1

5.9

4.9

4.1

3.5

Dividend Yield (%)

0.7

1.1

1.5

0.8

1.4

2.1

2.5

2.9

3.1

Source: MADARA for historicals, LHV for estimates

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TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Key Definitions/Formulas ROE

Net profit divided by average equity book value

ROCE

EBIT divided by average capital employed

ROA

Net profit divided by average total assets

EPS

Net profit attributable to shareholders divided by weighted average number of shares

BVPS

Equity book value divided by year end number of shares

Net debt

Total financial debt less cash and cash equivalents

P/E

Corresponding share price divided by earnings per share

P/BVPS

Corresponding share price divided by book value per share

EV/Sales*

Enterprise value divided by sales

EV/EBITDA*

Enterprise value divided by EBITDA

EV/EBIT*

Enterprise value divided by EBIT

Net gearing

Net financial debt divided by total equity

Debt/Equity

Total financial debt divided by total equity

Enterprise value

Market Capitalisation plus total debt plus minority interest plus preferred equity at market value plus unfunded pension liabilities and other debt-deemed provisions minus value of associate companies minus cash and cash equivalents.

Market Capitalisation

Number of outstanding shares at the end of the period multiplied by share price.

Source: LHV * To calculate EV for forward multiples we used the market capitalisation as of 20 th July 2021 while used the latest reported data (31st Dec 2020) for net debt, investment in associates, and minority interest.

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TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2021

MADARA Cosmetics AS

Contacts: Contacts: Ivars IvarsBergmanis Bergmanis

Sander SanderDanil Danil

Valters Smiltāns

Head Headof ofInstitutional InstitutionalMarkets Markets

Senior SeniorAnalyst Analyst

Analyst

Tel: Tel:+372 +372680 6802720 2720

Tel: Tel:+372 +372680 6802793 2793

valters.smiltans@lhv.ee

Mob: Mob:+372 +372534 53411114 11114

sander.danil@lhv.ee sander.danil@lhv.ee

ivars.bergmanis@lhv.ee ivars.bergmanis@lhv.ee

All images are sourced from www.madaracosmetics.com Date and time of sign-off: Tuesday 27th July 2021, 18:00

Disclaimer The copyright in this report belongs to AS LHV Pank (hereinafter ‘LHV’). LHV is a full service bank with a focus on the Baltic region. LHV is a member of the Tallinn, Riga, and Vilnius stock exchanges. LHV is under the supervision of the Estonian Financial Supervisory Authority (Finantsinspektsioon; see also www.fi.ee). Readers of this report should be aware of that LHV and LHV affiliated companies (hereinafter ‘LHV’s Group’) are constantly seeking to offer investment banking services to companies (hereinafter, ‘Company’ or ‘Companies’) mentioned in research reports or may have other financial interests in those Companies. AS LHV Pank has made an arrangement with AUGA group (‘AUGA’), AB whereby LHV’s research analysts independently produce research reports on AUGA group and provide them to AUGA for the purposes of providing more information about AUGA to investors who are not customers of LHV. In October 2019, AUGA group selected AS LHV Pank as an advisor as well as arranger and manager for a bond programme. The first tranche of such bonds were issued at the end of 2019. AS LHV Pank has made an agreement with EfTEN Real Estate Fund III on commercial terms whereby LHV’s research analysts independently produce research reports on EfTEN Real Estate Fund III. In turn, LHV is paid a fixed fee for a certain number of reports on an annual basis. AS LHV Pank has made an arrangement with MADARA Cosmetics (‘MADARA’), whereby LHV’s research analysts independently produce research reports on MADARA and provide them to MADARA for the purposes of providing more information about MADARA to investors who are not customers of LHV. MADARA is listed on the NASDAQ Baltic First North List. In addition to being the certified adviser for MADARA, LHV is also the certified adviser for Linda Nektar (‘LINDA’) on NASDAQ Baltic First North on an ongoing fee-based arrangement LHV’s Group acts as a market maker /(and)/ liquidity provider for TKM1T, APG1L, TVEAT, OLF1R, HMX1R, LINDA, and MDARA. All reports are produced by LHV’s research department. In order to proactively prevent conflicts of interest, LHV has established several procedural and physical measures. Such measures include, among other things, confidentiality measures through separation, or so-called “Chinese walls”, virtual and physical barriers to limit the exchange of information between different departments, groups or individuals within LHV Group. These measures are monitored by the compliance department of LHV. LHV does everything possible to avoid the conflict of interests but it cannot guarantee that conflict of interests situations do not arise at all. LHV provides coverage on this company on a regular basis, therefore this report may include assumptions and findings laid out in greater detail elsewhere. If interested, clients may approach LHV for these previous reports. This report is based upon information available to the general public. The information contained within has been compiled from sources deemed to be suitably reliable. However, no guarantee to that effect is given and henceforth neither the accuracy, completeness, nor the timeliness of this information should be relied upon. Any opinions expressed herein reflect a professional judgment of market conditions as at the date of publication of this document and are therefore subject to change without prior notice. LHV reviews its estimates at least once during financial reporting period and upon most major financial events. The report is not intended for public distribution and may not be reproduced, redistributed or published in any form whatsoever (in whole or in part) without prior written permission of LHV. The user shall be liable for any non-authorised reproduction or use of this report, whether in whole or in part, and such, reproduction may lead to legal proceedings. LHV does not accept any liability whatsoever for the actions of third parties in this respect. This information may not be used to create any financial instruments or products or any indices.

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27th July 2021

MADARA Cosmetics AS

Neither LHV nor its directors nor its representatives nor its employees will accept liability for any injuries, losses or damages, direct or consequential caused to the reader that may result from the reader’s acting upon or using the content contained in the publication. The analyst(s) of this report hereby confirm that the views expressed in this report accurately reflect their personal views about the Companies and securities covered at the time of publication. The authors further confirm that they have not been, nor are nor will be receiving direct or indirect compensation in exchange for expressing any of the views contained in the report. The analysts receive remuneration based on among others, the overall group revenues of LHV, including investment banking revenues. However, no compensation is based on a specific investment banking transaction. Trading with securities which are covered by a report is subject to strict compliance with internal rules governing own-account trading by staff members and third parties acting for the account of such staff members. This research report is produced for the private information of recipients and LHV is not advising nor soliciting any action based upon it. If you are not a client of LHV, you are not entitled to this research report. This report does not by any means constitute an offer or a solicitation, nor a recommendation to purchase or sell securities, commodities, currencies or other investments referred to herein. This report does not constitute independent investment advice. LHV does not assume any fiduciary responsibility or liability for any consequence, financial or otherwise, arising from any investment or disinvestment decision taken on the basis of this report. It has been prepared without regard to the individual financial circumstances and objectives of those who receive this report. The securities referred to in this report may not be suitable for all investors. Investors should independently and carefully evaluate every particular investment and seek the advice of a financial adviser if needed. The analysis contained in this research report is based on numerous assumptions; different assumptions could result in materially different results. Any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or warranty by or on behalf of LHV or any person within LHV that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realised. Past performance is not a reliable indicator of future returns. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate due to currency exchange rate moves and taxation considerations specific to that investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. The fair value range has been issued for a 12-18 month period and has been derived from a weighted approach combining both DCF valuation and relative multiple comparisons. The relative multiple comparisons further incorporate additional weighting considerations relating to the underlying metrics and time forecast periods. Company specific inputs have been forecast and a list of peer companies has been compiled by the LHV analyst(s) writing this research commentary, whereas the consensus peer data has been obtained from Bloomberg. For more detailed information about the valuation methods please contact the analyst(s) using the contact details provided above. For a useful summary of our coverage of this company, including the current sensitivity analysis, please refer to our latest monthly product: The Baltic Equity Companion. Alternatively you can also contact the analyst(s) using the contact details provided above. Although we do not issue explicit recommendations, for regulation compliance purposes we adhere to the following synthetic structure: •

Buy- Expected return of more than 10% within 12-18 months (including dividends)

Neutral- Expected return from -5% to 10% within 12-18 months (including dividends)

Sell- Expected return less than -5% within 12-18 months (including dividends)

In the 12-month period preceding 01.04.2020 LHV has issued recommendations, of which 39.3% have been ‘Buy’ recommendations, 44.0% as ‘Neutral’, 4.8% as ‘Sell’ and 11.9% as ‘under review’. Of all the ‘Buy’ recommendations issued, 15.2% have been for companies for which LHV has provided investment banking services in the preceding 12-month period. Of all the ‘Neutral’ recommendations issued, 13.5% have been issued to companies for which LHV has provided investment banking services in the preceding 12-month period. The classification is based on the above structure. For a list of recommendations that were disseminated during the preceding 12-month period, including the date of dissemination, the identity of the person(s) who produced the recommendation, the price target and the relevant market price at the time of dissemination, the direction of the recommendation and the validity time period of the price target, please contact the analyst(s) using the contact details provided above.

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TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE