LHV Bank research - Annual Review 2022 by MADARA Cosmetics

MADARA Cosmetics AS Annual Review

10th June 2022

MADARA Cosmetics AS

Table of Contents Investment Summary

Company Overview

MADARA Cosmetics Group

Management

Shareholders

History

Research and Development

Manufacturing

Raw Materials

Products

Brands

Certiﬁcation and Standards

Main Markets

Distribution Channels

COVID-19 Resilience

Russia-Ukraine War Implications

Sector Overview

Cosmetics Industry

SWOT Analysis MADARA

Print-on-Demand Project

POD Sector Overview

SWOT Analysis of Selfnamed

Financials

Revenues

Cost Structure

Proﬁtability

Non-Current Assets

Investments

Debt Position

Dividends

Valuation

ESG Considerations

Discounted Cash Flow

Peer Valuation

Valuation Summary

Key Risks

Financial Tables

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Investment Summary

Company Profile

Maintains good growth potential, but another resilience test ahead

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 in the Key Numbers (EURm)

2018

2019

2020

2021

2022E*

2023E*

9.5

11.5

16.1

19.4

22.3

27.0

Sales growth (%)

28.7

21.2

39.2

20.5

15.0

21.2

Net proﬁt (EURm)

1.5

1.6

3.4

3.7

3.4

4.9

EPS (EUR)

0.4

0.9

1.0

0.9

1.3

19.6

18.8

21.7

28.4

26.3

18.4

0.1

0.4

0.5

Sales (EURm)

P/E (x) Payout per share (EUR)# Payout yield (%)

1.1

1.5

0.8

1.4

2.1

1.9

P/B (x)

3.5

3.1

6.0

7.1

5.6

4.7

EV/Sales (x)

2.7

2.3

4.3

5.0

4.4

3.6

EV/EBITDA (x)

13.1

12.1

16.2

20.7

20.1

14.7

EV/EBIT (x)

17.7

17.9

19.5

24.2

24.9

18.0

ROE (%)

19.3

17.4

31.4

27.2

22.4

27.8

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LV0000101624

Industry (Bloomberg):

Consumer Discretionary

Sector (Bloomberg):

Consumer Products and Services

Website:

www.madaracosmetics. com

Share Data, as of 9th June 2022 Current Share Price (EUR):

24.00

Fair Value Range (FVR), EUR:

19.50-21.60

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

14.38

52-week High/Low (EUR):

31.20/19.00

3m Avg. Daily Volume (th):

0.10

Market Cap (EURm):

90.49

Ordinary Shares (m):

3.77

Key Shareholders, as of 9th Feb 2022 Uldis Iltners

23.92%

Lote Tisenkopfa-Iltnere

23.76%

Oy Transmeri Group AB

22.93%

Liene Drāzniece

6.79%

Zane Tamane

6.35%

12-Month Price Performance 30 26 22 18

LHV Fair Value Range: EUR 19.5. -21.6*

DCF EV/EBITDA P/E 13

* As of 10th June 2022

Source: MDARA, LHV *2022E-2023E multiples are based on the share price (9th June 2022) of EUR 24.00 per share. #Payout per share include dividends and share capital reduction.

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 more than 200 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 physical and online stores, premium resellers, and third-party 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. Also, this year MADARA has launched a print-on-demand (POD) start-up – Selfnamed (www.selfnamed.com), first in the industry, which is providing an opportunity to clients to start their own natural and/ or organic certified cosmetics line with their own brand logo and personalised design. We consider Selfnamed as a synergy project for the contract manufacturing segment which potentially could significantly increase output volumes and margins. However, at such an early stage we do not account for potential contribution from Selfnamed in our forecast, but we assessed the Selfnamed operations, industry, and market potential. 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 plays 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

10th June 2022

MADARA Cosmetics AS

long term. As we argue in this report, the Company possesses the products, market presence, and financial and operational capacity to expand for years to come. 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. Unfortunately, the COVID-19 crisis has been accompanied by the geopolitical crisis, i.e. Russia-Ukraine war, which has led to deep supply chain disruptions, causing inflationary pressures. Consequently, due to prolonged high inflation rates, soaring Consumer Price Index is exceeding average salary increase, pressuring consumer purchase power. Furthermore, factors like market competition and business partner contracts are limiting prompt product price adjustments to increased energy, logistics and salary costs, thus pressuring the Company’s profitability. We assume MADARA to be rather resilient to this geopolitical crisis and its implications and keep a positive outlook for the long term. However, we account for high uncertainty, potential risks and volatility in our valuation.

INSTITUTIONAL EQUITIES

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. The military conflict in Ukraine and associated sanctions on Russia and Belarus, leading to disruptions in trade flows as well as the possibility of tight monetary policy is increasing the fear of economic recession. Consequently, peer multiples have decreased noticeably. Although our cash flow forecast in DCF valuation is based on a positive outlook, considering heightened uncertainty in the region due to the Russia-Ukraine war and its implications on MADARA, we have applied an additional company risk premium. Overall, based on our current financial forecast for MADARA and other assumptions, we decided to decrease our fair value range (‘FVR’) for the stock from the previous EUR 23.80-26.30 to EUR 19.5-21.6 per share.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

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. The Company has extensive vertical integration with each product being exclusively developed and manufactured in MADARA’s own laboratories and production facilities, enabling it to take roughly 100% control over all processes. Also, the in-house marketing and design team enables MADARA to have a unique brand identity. Organic ECOCERT certification, GMP and ISO standards, in vitro and in vivo research 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. Recently the Company has launched a print-on-demand platform – Selfnamed which offers personalisation of MADARA manufactured certified natural and organic cosmetic products.

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, which are important sales channels in the Latvian market, located in shopping centres – “Galerija Centrs”, “Spice”, “Alfa”, and “Akropole”. The newest store in “Akropole” was launched in April 2019. In FY 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. In FY 2021, although sales from the Company’s brand stores declined to EUR 0.46m (-46% y-o-y) due to the COVID-19 related restrictions, net profit reached EUR 0.15m (FY 2020: EUR 0.01m) due to the government support. As restrictions have been loosened in Q1 2022, retail stores have seen increased activity. MADARA Cosmetics GmbH provides cosmetics marketing services in Germany and organises the distribution of MADARA products in that market. Cosmetics NORD SIA is focused on rendering contract manufacturing services using the production infrastructure and capacity of MADARA, with sales amounting to EUR 1.1m in FY 2021, up by 282% y-o-y and 88% compared to FY 2019. 2020 results were down due to difficult circumstances related to the COVID-19 restrictions in the operation of several partners. However, contract manufacturing sales grew rapidly in H2 2021 contributing 9% to total sales, while the contribution in FY 2021 was 6%. Such growth is attributed to the post-pandemic momentum and new contract manufacturing strategy that replaces individual adjustments in formulas with a ready-to-choose catalogue, which substantially increases efficiency and does not impact partner satisfaction. Generally, contract manufacturing is a thin margin business and for MADARA the gross margin in contract manufacturing has been around 18%, compared to the gross margin of c.a. 50% in Latvia’s own retail shop business and c.a. 60% for all operations taken together (largely driven by direct e-commerce). Besides improving efficiency in contract manufacturing processes, the new strategy also has a second leg which focuses on a new start-up project launched by MADARA, i.e. ‘Selfnamed’. SIA Cosmetics Nord’s subsidiary Selfnamed SIA is a new start-up in the print-on-demand industry. The print-on-demand

INSTITUTIONAL EQUITIES

platform Selfnamed (link: https://selfnamed.com) is providing an opportunity for clients to start their own natural and/or organic certified cosmetics line with their own brand logo and personalised design. SIA Cosmetics Nord produces distinct products compared to “MADARA” and “MOSSA” branded products. 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 dayto-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

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

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.

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. Tatjana Čornija – Member of the management board. A graduate of the Stockholm School of Economics in Riga. Chief Financial Ofﬁcer of AS MADARA Cosmetics since January 2021. She was a business analyst at MADARA Cosmetics from May 2018 to December 2020.

Shareholders MADARA shareholders (9th Feb 2022) 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. increase in the Uldis The Iltners

Management Board

16.25%

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

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

23.92%

6.79% 6.35%

Lote Tisenkopfa-Iltnere Oy Transmeri Group AB Zane Tamane

23.76% 22.93%

Liene Drāzniece 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.

2021

16 new skincare and makeup products were launched under the MÁDARA brand. The most significant new products included technologically complex formulas of vitamin C cream and serum as well as the Deep Matter Bold Volume Mascara, which was ranked among the best-selling MÁDARA products in the first month after it was launched. A product of completely new category has also been added to the assortment – natural certified, gynecologically tested intimate wash for women

Source: MADARA

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

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 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 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 onwards 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 2019, MADARA introduced the ‘Time Miracle’ product line, the world’s first anti-ageing skincare product based on birch water, which 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. In 2018, MADARA 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 in 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 a moisturising cream with Centella Asiatica (CICA) plant extract in SOS Hydration skincare line. The quick integration of innovative ingredients and solutions as well as rapid adaptation to changing consumer preferences and market trends by in-house R&D was noticeably observed in 2021 when 16 new skincare and makeup products were launched under the “MA-

INSTITUTIONAL EQUITIES

DARA” brand. The most significant new products include technologically complex formulas of Vitamin C cream and serum, products of even higher protection in the highly demanded SPF line, as well as the Deep Matter Bold Volume Mascara, which was ranked among the best-selling MADARA products in the first month after it was launched. A product of a completely new category has also been added to the assortment – natural certified, gynecologically tested intimate wash for women. The R&D competence is highly valued worldwide with MADARA skincare products regularly receiving recognition in international competitions. In 2021, MADARA Derma Collagen Hydra-Fill Firming Serum was recognised as the best serum in several categories at the Beauty Shortlist Awards (UK). MADARA ACNE Acute Spot RollOn was recognised as the best product for acne-prone skin. MADARA makeup products have also been ranked highly – MADARA Skin Equal Soft Glow Foundation SPF15 has been recognised as the best foundation, and MADARA Velvet Wear Matte Cream Lipstick has been recognised as the best lipstick. In the Dutch Beauty Awards 2021 – an important event in the Netherlands – MADARA skincare products were nominated in the Green Beauty and Innovative Beauty categories.

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 its current factory, which has been fully commissioned since February 2016. The factory was 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 working with no shifts, meaning that one night shift can be implemented to raise the production capacity. Furthermore, with proper planning, the tasks could be distributed into shifts in a way that does not require doubling the people needed to double the production output. Also, MADARA manufacturing is highly automated, although still plenty of manual labour required in the packaging process. In H2 2021, the first robots joined MADARA’s production team, facilitating the packaging of products in the primary packaging and transportation boxes. MADARA is striving to enhance productivity and efficiency in manufacturing by extending and upgrading automatisation. MADARA is already planning the construction of a new manufacturing plant that is bigger in space and production capacity, located right across the street where the current plant exists. The current assumption is that the new plant will be able to achieve c.a. 10x capacity compared to the current plant which is a notable increase. Such production capacity expansion in our opinion is justified by the Company’s continuously growing product assortment, market expansion, and sales growth. Start-up project Selfnamed could potentially require a lot more production capacity in the coming three years or if Cosmetics Nord SIA decides to supply white-labelled cosmetics to other print-on-demand manufacturers.The construction is planned to begin in 2023, although the existing supply chain bottlenecks and soared material prices put certain risks to the planned project schedule and cost. The construction and transition period to new production facilities could take up to 2-3 years. Besides, the Company aims for 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.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

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, hyaluronic 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, deodorBrand

ants, shampoos, conditioners, intimate wash 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. Facial care products, accounting for 55% of the total revenues in 2021, dominate the breakdown of MADARA’s sales by product categories. Other larger product groups of the Company include anti-age (14%), which are also rather facial care, and makeup (13%) products, followed by body (9%) and hair care products (8%). The launch of makeup products in September 2019 affected the breakdown of MADARA’s revenues by product groups significantly already in 2020 (12% of total sales) compared to 2019 (3% of total sales). 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. It is expected that the makeup segment will be one of the key priorities for MADARA’s further development and considering its rapid gain in turnover share within a year from the makeup line launch, it is also expected to continue to grow its share in total sales. Significant demand can be observed for certified natural makeup as the Deep Matter Bold Volume Mascara, was ranked among the bestselling MADARA products in the first month after it was launched in 2021. The Company continues to upgrade existing and release new products every year, many of them being highly demanded and some with technologically complex formulas. Continuous expansion of product assortment and new categories is one of the main drivers of MADARA’s brand recognition and sales growth.

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. 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

‘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.

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Brand...continued

‘MADARA’

‘MOSSA’

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’ products are to be offered in premium- "MOSSA’ products are sold through mass marbeauty stores, department stores and small luxury ket skincare channels including beauty chain organic shops, including via e-commerce channels." 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, Caudalie, Dr. Hauschka and Origins."

MOSSA’s competitors are mass product lines in each respective country, such as Lumene, L’Oreal, Nivea, Lavera, etc.

Source: MADARA Cosmetics

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.

Certification and Standards 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 21.3% during 2019-2021. It has high brand recognition and consumer loyalty. In 2021, the Company’s net sales in the Latvian market amounted to EUR 4.8m (+14% y-o-y). Originally MADARA gained popularity as a local, sustainable skincare manufacturer, but now it is a well-known story of successful Latvian entrepreneurship. In 2021, total sales amounted to c.a. EUR 12.6m (+18% y-o-y) and EUR 1.8m (+89% y-o-y) in the EU (excluding LV) and other countries together, respectively, with a CAGR of 29% and 58.6%, respectively, during 2019-2021. Finland is one of the Company’s ﬁrst and largest export markets, with

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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 included 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. After c.a. 8 years of successful cooperation, at the end of 2021, Noora announced the discontinuance of cooperation - although she mentioned continuing support to MADARA in other ways. It has given strong brand recognition and foundation to maintain as one of the main organic cosmetic players in the Finland market. MADARA has strong connections with Oy Transmeri Group AB (‘Transmeri’), one of the largest cosmetics 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. 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 and France, but also increasingly in the Netherlands, UK, Spain, Sweden, Denmark, and Belgium. 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 is also entering Asia-Paciﬁc and Middle East countries, and in fact, it already has a presence in some of them now.

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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 MADARA’s distribution can be broken down into two larger channels - direct and third-party distribution (wholesalers). For more than five years, the Company has done direct distribution to clients in Germany and France (the largest cosmetics markets in the EU) and considering the positive results, in recent years, MADARA has taken up the challenge to distribute its products directly in markets such as the Netherlands, Belgium, United Kingdom, Sweden, and Denmark. Direct distribution increases profitability by excluding intermediary wholesalers, but increasing transportation costs and selling costs, however the end result (bottom profitability) is positive according to experience in Germany and France. 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 and direct distributor of the ‘MADARA’ brand in Germany. Direct e-commerce, which has become one of MADARA’s main distribution channel (2021 - 36% of total sales), possess the highest margins as it excludes all intermediaries (e.g., wholesaler, retailer), this fact is supported by steep growth in direct e-commerce sales proportions in 2020 (35%) and increasing gross margin by 6.2pp and EBITDA margin by 7.6pp y-o-y. The second is third-party distribution – wholesalers. Although this distribution type has thinner margins it is an important channel for new or complicated market penetration (e.g. Asia) as wholesalers usually have good knowledge about the market itself and have client networks with good business relations. 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 highest margin channel, a direct e-commerce platform. The stores are operated under the ‘madaracosmetics’ domain with many different extensions, such as .com, .lv, .ee, .fi, .de, .lt, .uk, .fr etc. Also, MADARA on regular basis is working on search engine optimisation and social media optimisation, which drives website visits, and consequently sales. Recently, MADARA invested to modify the e-commerce platform to be much more compatible for interaction and purchases via phones and tablets, considering that more than 50% of visits are via mobile phones and interaction from advertising on social media is via such devices (c.a. 95% use social media through mobile phones). Most people are also searching on Google using a mobile device. In November 2016, Google announced a major change to the way crawling websites and started to make their index mobile-first, which means the mobile version of a given website becomes the starting point for what Google includes in their index (search result priority). According to the latest announcement, MADARA is planning to utilise cookies to personalize offers according to customers’ profiles. The Company’s third-party retail distribution chain includes conventional and online retailers across 25+ 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,

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and organic perfumeries, as well as beauty chains with dedicated shopping areas for natural skin care products. Online retailers include several well-respected specialised online shops like douglas.de, ﬂaconi.de, feelunique.com, lovelula.com, najoba.de, and greenglam.de. Douglas is the leading premium beauty platform in Europe, with about 40% e-commerce market share in Germany. 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 brand through other pharmacies outside Latvia and similar channels.

COVID-19 Resilience 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 third-party platforms and physical stores.

Russia-Ukraine War Implications The Company has mentioned that no supply chains have been affected as there are no suppliers in Russia, Belarus, and Ukraine. Furthermore, MADARA has stopped exports to Russia, Belarus, and Ukraine which will have a very minor impact on the Company’s sales (less than 1%). Russia’s invasion of Ukraine has caused both sided sanctions which have torn mutual economic cooperation. Also, the warfare has resulted in a steep increase in commodity and energy prices, pressuring consumer purchase power which might reflect in MADARA´s sales. However, the personal care industry has shown resilience to the economic crisis as the personal care goods are similar to first necessity goods, namely, people need to wash and take care of their appearance. The Company reported Q1 2022 sales of EUR 4.8m (+7.4% y-o-y and +5.6% q-o-q). The sales in European Union countries (excluding Latvia) increased by 14% y-o-y, while sales in Latvia and outside the EU declined by 2% and 4%, respectively. This slower growth has been mostly the result of the escalating war in Ukraine in the first quarter which reduced activity in several of the Company’s markets. Especially in Eastern Europe, consumers are more anxious due to the proximity of warfare and history that is similar to current developments in Ukraine. Due to this situation, MADARA conducted much fewer sales campaigns, simply because it was not relevant to society as people were highly concerned about war escalation and focusing on their safety. The first panic reaction should be over, and although we expect more consumer activity in the rest of 2022, we now have empirical evidence that consumer behaviour is impacted by warfare developments in Ukraine. This will also depend on how quickly MADARA will restart its sales campaigns in Q2 or coming quarters. We believe that sales in the Latvian market were more impacted by the geopolitical crisis compared to central and western European markets, with people concentrating more on first necessity goods. We expect the geopolitical crisis to be long lasting, thus prolonging the commodity and energy inflation effect. MADARA has evaluated that high energy prices do not cause a meaningful decrease in profitability as the Company’s manufacturing does not involve high energy consumption. It is unlikely that product prices will be adjusted any time soon this year as business partners

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usually ask for price adjustments in advance. This initially seems to significantly lower the profitability; however, the Company has sufficient finished goods and raw material inventories for the coming quarters this year, thus the price increase of raw materials during this year would not affect it. The energy, logistics, and salary inflation all together still will negatively impact profitability, but the impact should not be significant. With trade sanctions imposed by the EU on Russia, many supply chain disruptions have occurred, and the trade sanction list is continuously extended. Russia has gravity in global trade, e.g. it is the

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5th global exporter of iron and steel, 1st in nickel and 2nd in aluminium exports. Construction companies are increasingly warning about the steep price increase in raw materials and even unavailability. Although the new production plant construction is planned to be initiated in 2023, the current situation has no timetable. The implications potentially could be postponed construction and a much higher capex than planned. But there should not be immediate growth concerns as the current production plant can achieve more than double the capacity.

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Sector Overview Cosmetics Industry 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

France

21.5

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

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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-largest 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 cosmetic products

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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.) accounted for 23% of total sales. Increasing rates of internet penetration worldwide, together with ease of availability and attractive discounts coupled with the COVID-19 pandemic impact which created obstacles to the conventional sales channels, has led to a growing preference of consumers to buy online. According to Loreal annual cosmetics research 2020, around 22% of total sales were made through e-commerce channels compared to 14% in 2019. 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 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. Apart from changing consumer preferences, the legislative landscape in Europe is also a growth driver for natural and organic personal care products. The European Green Deal (‘EGD’) is the European Commission’s new growth strategy to transform the EU into a sustainable and prosperous society with a modern, resourceefficient, and competitive economy. This ambitious strategy and its policy initiatives aim for net-zero greenhouse gas emissions by 2050 and seek to decouple economic growth from resource use. The EGD will drive the EU’s policy and regulatory frameworks for many years to come and will deeply affect the external operating environment for the cosmetics sector which will be obligated to face a series of policies, over 30 strategies, and a great number of initiatives. The first thing the cosmetics companies will have to tackle will be the challenges related to introducing sustainable packaging. However, many activities are already voluntarily applied by companies on their own initiative, including MADARA which applies reusable and BPAfree packaging. Businesses that were thinking forward have already implemented (and most importantly tested) the systems and innovative solutions in the field of eco-design of packaging, recycling, contact with the consumer, and environmental marketing declarations. Now, they will only need to adjust to the new regulations which shorten the transition time. A further step in the transformation seems to be a revision of the rules for product safety assessment. Probably, all cosmetic regulations will be based on risk assessment. The Commission intends to carefully assess the environmental footprint and risk to human health of each substance contained in the products. An ingredient considered hazardous to health or the environment will be allowed

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to be used only in the categories of products considered essential. However, the criteria for indicating the essential products have not been published yet. On 25th April 2022, the European Commission published a “Restrictions Roadmap” as part of the EU’s Chemicals Strategy. The roadmap sets out priorities for the European Chemicals Agency before the revision of the REACH Regulation (estimated for 2027). The plan focuses on entire classes of chemical substances for the first time as a rule, including all flame retardants, bisphenols, PVC plastics, toxic chemicals in single-use nappies and PFAS, which are also known as “forever chemicals” because of the time they take to naturally degrade. A new study by Notre Dame University concluded that many cosmetics sold in the United States and Canada likely contain high levels of PFAS, a potentially toxic class of chemicals linked to a number of serious health conditions. Scientists tested more than 200 cosmetics including concealers, foundations, eye and eyebrow products and various lip products. According to the study, 56% of foundations and eye products, 48% of lip products, and 47% of mascaras tested were found to contain high levels of fluorine, which is an indicator of PFAS use in the product. For MADARA, since all products and production facilities have been ECOCERT certified since 2008, which means that the raw materials allowed to use are those that do not adversely affect the environment and people, PFAS is not part of the product formula and there is a good reason to believe that there will be nothing or nothing significant in the new roadmap to pose a risk or change to the Company’s existing products. In 2020, the European Commission launched the New Consumer Agenda to empower European consumers to play an active role in the green and digital transitions. The New Consumer Agenda aims to present a vision for coherent EU consumer policy up to 2025 and to consolidate the EU consumer protection law. The Commission aims to ensure that sustainable products are available to consumers in the EU market and that consumers have better information to be able to make an informed choice. The Commission will present proposals to equip consumers with better information on the sustainability of products and to fight practices, such as greenwashing or early obsolescence. The Commission will also promote repair and encourage more sustainable and “circular” products. One already taken initiative was implemented in October 2021. The European Commission adopted new EU Ecolabel criteria for cosmetics and animal-care products, offering consumers across the EU the benefit of trusted proof for genuine green brands. Currently, three out of four care products sold in Europe display an environmental claim or label, and yet many of these claims are difficult to understand or confusing for the consumer. The EU Ecolabel is a reliable third-party verified label of environmental excellence, which takes into account the environmental impact of a product throughout its entire life-cycle, from the extraction of raw materials to the final disposal. The updated EU Ecolabel criteria will now apply to all cosmetic products, as defined under the EU Cosmetic Regulation. The previous requirements for cosmetics to be awarded the EU Ecolabel covered a limited range of so-called ‘rinse-off’ products such as body wash, shampoo, and conditioner. The updated rules include ‘leaveon’ cosmetics such as creams, oils, skin care lotions, deodorants and antiperspirants, sunscreens, as well as hairstyling and make-up products. Although MADARA does not possess the Ecolabel, the ECOCERT is widely recognized with its rigid standards for natural and organic cosmetics and ecological packaging, thus acquiring Ecolabel would be a great addition to the brand, but, currently, it already possesses the qualities demanded and recognised by consumers. Eventually, consumers are becoming more aware of the

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10th June 2022

MADARA Cosmetics AS

sustainability claims and do pay increasing attention to labels which can be trusted. 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. One of the reasons behind that is the increasing penetration of technology and social media, which enables the content to reach billions of people in seconds and is distributed further by viewers. This approach is widely used in the personal care industry. The original influencers, famous actors and musicians have lent their faces (and hair and bodies) to countless ad campaigns for beauty brands, and to this day, they still do, often as extremely well-compensated brand ambassadors. But it seems, nowadays, being a beauty-brand spokesperson simply isn’t enough for some of the more aesthetically eager and ambitious celebrities. We are living in the age of the celebrity beauty brand. Out of many examples some are Rihanna: Fenty Beauty & Fenty Skin, Jennifer Lopez: Jlo Beauty, Alicia Keys: Keys Soulcare, Selena Gomez: Rare Beauty, Kim Kardashian: KKW Beauty & KKW Fragrance, Lady Gaga vegan, and cruelty-free cosmetic brand: Haus Laboratories, or if considering natural cosmetics then Jessica Alba: Honest Beauty, which in its prospectus emphasises the importance of Jessica Alba’s role in brand awareness and company’s growth in domestic and international markets. The importance for cosmetics brand having celebrity brand ambassador can also be observed in numbers. Fenty Beauty recorded USD 72.0m in earned media value (via WWD) and according to Guardian within one month of release, Fenty Beauty’s sales were valued at USD 72m. Haus Labs was the third bestselling celebrity makeup brand of 2020, earning over USD 141.7m of media value. It was only behind Fenty Beauty and Kylie Cosmetics, as first and second place, respectively (via WWD). 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 toward 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. The competition is therefore intensifying, with several other international best-selling brands with innovative ingredients entering the Finnish market in recent years. Skincare, haircare, and makeup are widely using organic care prod-

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ucts, 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 toward 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 throughout 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 product 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. 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 homebound 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 online orders for skincare and makeup products in Saudi Arabia have 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 beneplay a prominent role in the coming years. MADARA has also benefit-

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

ted a lot from this development in the past two years and expects online channel to grow. 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. SWOT Analysis of MADARA

Strengths MADARA has many strengths that differentiate it in the industry and serve as tools to promote growth. Consumers are gradually becoming more informed about the adverse effects of many synthetic chemicals used in daily use products and leaning towards the use of natural and organic origin products including cosmetics, that are friendlier to nature and the human body. Also, industry legislators are pushing towards safer cosmetics and packaging for consumers and the environment, and a meaningful contribution to both objectives is employing natural raw materials. MADARA possess very strong sustainability principles that are incorporated throughout its products and operations which is strongly valued by consumers. As the industry at certain extent already requires adapting products and aims to improve sustainability standards in future, MADARA is steps ahead of its competitors, which will allow continuing growth without disruptions. The Company’s vertical integration gives almost full control over all processes making its brand representation unique, ensuring seamless product quality and possessing fewer supply chain risks. With numerous awards and becoming a pioneer in a complex formula products, MADARA proves its R&D to be highly innovative, bringing demanded high value-added products to consumers. Unique marketing is a result of vertical integration, the Company has an in-house marketing team which is highly dedicated to developing MADARA’s brand and delivering a sophisticated brand image. The Company exploits diverse sales channels getting its products easily available to consumers. A strong online presence on the most popular cosmetics e-commerce platforms in the EU and its own direct e-commerce channel have become crucial for the Company’s sales growth as an increasing number of consumers prefer to shop cosmetics online. Also, its own e-commerce platform allows MADARA to effectively advertise itself with direct links on social media and other ad-supported apps and websites, as in the case of third-party retailers the initiative would have to come from them. Thus, MADARA is able to create unique and frequent product campaigns in a wide market spectrum, along with enhancing profitability.

Opportunities Considering the gradual demand increase for natural and organic cosmetics and industry trends, MADARA has the opportunity to use its tools (strengths) and penetrate main cosmetic markets achieving growth and strengthening its position in the future. Increasing consumer preference for online shopping has been very beneficial for MADARA in terms of sales growth and profitability. This was possible because the Company had developed a convenient and widely available e-commerce channel. Also, with steep direct e-commerce channel growth, the Company has made a noticeable investment in its further development which will support further direct e-commerce channel growth. We believe that the COVID-19 pandemic has changed consumer shopping preferences that will continue going forward, of course, physical sales channels will see recovery at certain extent. Currently, there is an opportunity to maintain the existing consumer base in the online sales channel and cultivate more online traffic by developing the direct e-commerce channel which will convert into competitiveness, sales growth, and higher profitability.

Weaknesses MADARA had quite a successful cooperation with Noora Shingler, launching custom-made products for the Finnish market, which substantially promoted the MADARA brand and eventually, it has become the third best known organic cosmetics brand in Finland. Using brand ambassadors is one of the most preferred promotion tactics in the cosmetics industry due to its effectiveness. After successful results with the Noora project, we would like to see MADARA doing the same in other main markets like Germany, France, the UK etc. However, MADARA compared to its peers is a very small company and acquiring a highly recognised brand ambassador in markets like Germany, France, or the UK might be extremely expensive, thus it will be hard for the Company to apply this strategy in bigger markets.

Threats The gradual increase in natural and organic cosmetics demand has been observed by the industry leaders which also have released natural and organic cosmetics lines. Leading mass brands have different strategies for entering the market, with one being acquisitions. Thus, the extent and pace of cosmetic giants entering the natural and organic cosmetic niche would be very decisive for MADARA’s growth and market position strengthening in the coming five years.

Internal Factors Strengths (+) •

Sustainable product and packaging

•

Vertical integration

•

Innovative R&D

•

Unique marketing

•

Diversified sales channels

Weaknesses (-) •

Limited brand ambassadors

External Factors Opportunities (+) • •

Market penetration Utilizing direct e-commerce platform

Threats (-) •

Increased competition in natural/organic cosmetic segment from multinational corporations

Source: LHV

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Print-on-Demand Project With 15 years of experience in contract manufacturing, MADARA has expanded its manufacturing service by creating a print-on-demand (POD) start-up – Selfnamed. We consider Selfnamed as a synergy project for the contract manufacturing segment which potentially may significantly increase output volumes and margins. A valuable feature is that products are retaining the COSMOS natural and/or organic certification that is compatible with EU and US standards. The self-service experience via the Selfnamed platform includes a design studio with drag-and-drop features that allows placing the user’s brand elements into label and box layouts. Market research shows that there is no other POD manufacturer offering certified natural and organic cosmetics, however, Selfnamed has cooperation with an integrated platform “Sell” that does not own printing equipment but lists Selfnamed or Cosmetics Nord SIA products in their product assortment. Currently, the “Sell” platform complements what Selfnamed is missing, that is, the possibility of integration with an e-commerce store and drop-shipping. Also, the possibility to manufacture white-labelled cosmetics, on a contract basis, for other POD manufacturers is an option, but currently developing Selfnamed is a priority. The potential client segment is very wide. Custom labelling can be of interest for brand owners like hotels creating personalised hand soaps or body/hair wash or retail chains creating personalised hand care products. Considering that there is no minimum order size, such a service is available for clients that want to make a customised gift or have a custom product labelling for events. Also, influencers and content creators are seeking ways how to monetise their brand, such a platform is an easy way to personalise products. According to the management, the Selfnamed platform is targeting low-medium size orders; however, for high quantity orders, MADARA uses outsourced labelling service as it is done for contract manufacturing partners currently. The product assortment and features, like 3D product visualisation or platforms integration with Amazon, Shopify etc., at Selfnamed currently is limited or not available, but according to the management, it will be extended over time if the desired demand will approve. While the platform lacks vital features for clients who want to commercialise their brand, the Selfnamed platform is deemed to be more appealing for individual orders. However, as mentioned, the cooperation with Sell partly solves the problem. As more companies and society, in general, are looking for ways to make themselves more sustainable, MADARA products and packaging are suitable for such purposes. From a closer inspection of the Selfnamed product offer, products are very similar to MOSSA brand products considering the International Nomenclature of Cosmetic Ingredients (‘INCI’). However, the proportions of ingredients which are not displayed are likely different making Selfnamed products somewhat distinctive from MOSSA. The principles of production, inventory planning and risk management must also be taken into account here. It is more efficient to buy 1,000 kg of one basic raw material and use it for several brands than to buy 2 different basic raw materials just to make INCI different. In terms of both price and risk, there is no need to throw out the raw material if the product X that uses the base raw material for some reason does not sell. We consider Selfnamed products manufactured by Cosmetics Nord SIA quite distinguished from the “MADARA” brand in terms of formula complexity and target customer. However, the Selfnamed products in price and supposedly quality overlaps with “MOSSA” and eventually targets same customers. This could potentially result in somewhat self-competition decreasing “MOSSA” sales. While Selfnamed will have a high gross margin, the positive effect potentially

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could occur only in high volumes. Importantly, our estimates do not include the potential contribution of Selfnamed in terms of revenues or profits. Currently, we are reviewing the Selfnamed itself, the industry it is operating in, and its overall market potential.

POD Sector Overview Print-on-demand (POD) and personalisation are two of the hottest trends happening right now in the printing business. But even though they’re having a moment, they’re not entirely new to the scene; it’s just that, currently, available technology lets entrepreneurs do some pretty amazing stuff with them. By the 1980s, printers started to become available to the public, and print on demand took off. It started out with paper and then evolved into being able to print on fabric too – what is called direct-to-garment (DTG) printing. The first real DTG printer was called ‘Revolution’, and it became available in the 90s. However, modern POD manufacturing as we know it today has risen in the last decade. Print on demand means that your piece of clothing (or whatever else you’re printing on) doesn’t actually get printed until a client places an order, allowing prints of single or small quantities. Furthermore, designing has been largely simplified and does not require extensive knowledge. For a business owner, it means you don’t print unless you’ve really sold something. This is a fairly new way of going about printing. Traditionally, they would create inventory by printing a certain number of products. Then, they would work with this inventory to sell their creations. Especially beneficial for individuals who almost in any scenario do not prefer to order bulk personalised t-shirts or other merchandise, can now access single quantity order for reasonable price. There are a few reasons why traditional printing can be inconvenient. One, it’s riskier. Business owners need to make their best guess at what people will want to buy unless they’ve got extrasensory perception. Then, businesses can easily end up with a big stack of products that for whatever reason just aren’t selling, as they typically have to order in bulk. For building up inventory, capital is needed that sometimes isn’t there or people aren’t willing to risk with. Printon-demand changes this approach. For example, content creators, influencers, or any kind of brand holder can design a product on the POD platform and list it on their e-commerce platform which is connected with the POD manufacturer. A popular approach for today’s merchants is using Shopify which enables them to create a website in minutes with all the necessary integrated features like payment gateways, performance tracking, and easy integration with many POD manufacturers. When you receive an order for your custom product, it goes to the POD manufacturer which fulfils the order and ships it to the customer. Doesn´t seem much effort compared to the traditional business approach, right? That is the reason why so many are using POD as it is a low-risk business model and creators can concentrate mostly on creating their public figures and visualisations for products. However, there are some limitations and not so appealing aspects. Naturally, your costs per item will be higher than if you buy in bulk. Also, these integrated platforms do cost a commission and there are many intermediaries, thus margins are usually very thin. Choices are limited, meaning that the ability to customise products depends on the vendor and the product. You’ll have to weigh base costs, customisation options, and available sizes when deciding which products to customise. Also, shipping costs can get complicated, as it might vary for different POD products. Options are also limited if you want to create a standout unboxing experience. But POD is not only for content creators or influencers to sell their brand. Companies can use it to print work uniforms or custom accessories with the company’s logo on them for their own use or gift them to clients. Also, individuals, which is actually the largest customer base for POD manufacturer businesses, can create personalised apparel or other accessories for their own use or design them, especially for

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Source: EcommerceCEO

some events or personalising gifts to friends and family. The target segment is very wide for POD platforms considering different types of business clients and different types and ages of individuals. The demand for POD is expected to grow at a high rate in the coming years. According to Research Reports World, the global POD software market size was valued at USD 1.81bn in 2021 and is projected to reach USD 7.05bn by 2028, growing at a CAGR of 19.7% during 2022-2028. Global core print on demand software manufacturers includes Printful, Teespring, SPOD, Gelato, Teelaunch, etc. The top five companies hold a global market share of about 40%. Americas is the largest market, with a share of c.a. 47%, followed by Europe and Asia-Pacific with a share of c.a. 27% and 20% respectively. In terms of product, integrated is the largest segment (integrated fulfilment), with a share of over 65%. In terms of user groups, the largest user group is individuals, followed by businesses. The POD manufacturing business is largely automated, with high margins. According to the latest data on Lursoft, Printful Latvia AS (a subsidiary of Printful Inc, also known as the first unicorn originating from Latvia), which owns POD manufac-

turing and distribution facilities in Latvia, Spain and the UK reported a gross margin of 50% in 2020 and 57% in 2019. The operating margin reached 30% in 2020, compared to 34% in 2019. Also, the CEO of MADARA indicated that the gross margin for Selfnamed is high and comparable to the direct e-commerce segment’s gross margin. POD manufacturers commonly have product assortment from thirdparty providers, thus as an intermediary in the sale of products, the margins get thinner as opposed to Selfnamed which sells cosmetics provided by its parent Cosmetics Nord SIA. When it comes to products that are offered, there are plenty of options (e.g., t-shirts, mugs, bags, posters, towels etc.), with the most popular ones being clothing and different accessories. This can be concluded from the general offer categories from POD platforms. Also, by looking at Google Trend statistics we see that personalised clothing and accessories are subject to the highest interest in Google search, followed by stickers and posters (see Graph 1). Personalised cosmetics are rather unpopular in comparison. According to our research, no other POD manufacturer is offering organic certified cosmetics, however, Selfnamed has cooperation with an integrated platform “Sell” that does not own printing equipment but lists

Google Trends, Interest Over Time (100=max) Graph 2

Google Trends, Interest Over Time (100=max) Graph 1 150 150 100

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0 Jan-19

Jan-20

Feb-21

Personalised clothing Personalised sticker Personalised posters Source: Google Trends

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Mar-22

0 Jan-19

Jan-20 Personalised gifts

Personalised accessories Personalised cosmetics

Personalised accesories Source: Google Trends

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

Feb-21

Mar-22

Personalised clothing

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MADARA Cosmetics AS

Selfnamed products in their product assortment. The unpopularity might be simply explained that if such products have not been on the market, people do not consider searching for them so often. As for almost every new product or service, it will require an extensive advertising campaign to introduce people to it before the word spreads out. Furthermore, according to Google trends, the overwhelming majority of searches are for personalised gifts in general (see Graph 2). As a rule of thumb, cosmetics are often used as a gift, thus this could indicate the demand for personalised cosmetics. Last but not least, keeping in mind the general increase in demand for natural and organic cosmetics which was discussed earlier, should also drive the demand.

cluding cosmetics, that are friendlier to nature and the human body. Also, industry legislators are pushing towards safer cosmetics and packaging for consumers and the environment and a meaningful contribution to both objectives is employing natural raw materials. As this becomes more important for consumers it becomes more important also for business owners that use POD services, as data shows in the Printful survey (2021), sustainability is part of the business focus for 55% of POD business clients. Selfnamed products do possess all the rigid sustainability principles that other MADARA products possess, making Selfnamed products very appealing for both individuals and businesses. Especially, customers could respect the ECOCERT certification for Selfnamed products.

The competition between POD providers takes on several aspects: service and product price, product assortment, integrations, service, and product quality. Considering price aspects, POD platforms compete with subscription plans that give access to additional features for designing, product discounts, better fulfilment service, etc. Some POD providers have fulfilment locations internationally, which does reduce shipping costs and time substantially, thus appealing to users in different markets. Furthermore, a wider product assortment means a wider target segment. Also, business clients have more possibilities to expand their product assortment and individuals will likely seek for gifts to personalise where the product assortment is the widest. For instance, Printify offers a selection of over 300 products while Printful offers access to 293 customisable products, including t-shirts, tank tops, hats, hoodies, face masks, and more. According to the Printful survey 2021, sustainability is part of the business focus for 55% of businesses and most eco-friendly products are considered natural and organic (80%), recycled (76%), fair trade (49%) and vegan (26%). Integrations play one of the main roles for POD platforms. Commonly sellers would want to list their merchandise on as many e-commerce platforms as possible. The POD automatic fulfilment principle works only for those e-commerce platforms for which they have application programming interface (‘API’) integration, thus the range of integrated e-commerce platforms plays a vital role in the POD business model. Further, service and product quality also give a competitive advantage. The service quality is set by undisrupted operations, available features such as being able to view a designed product in 3D or the amount of available ready to use images for designs and capabilities of design software in general. Understandably, product quality is important as customers expect good price/performance for products, importantly, it directly impacts the reputation of the business client’s brand.

Products which are produced by the parent company, especially at a very close location, significantly reduce supply chain risks, better priority in order processing, reduces logistic costs, and increases margins.

SWOT Analysis of Selfnamed Strengths

Consumers are gradually becoming more informed about the adverse effects of many synthetic chemicals used in daily use products and leaning towards the use of natural, organic origin products in-

Opportunities

Based on our market research, Selfnamed currently is the only POD manufacturer providing natural or organic cosmetics. Thus the Company can have a first-mover advantage and gain substantial niche market share. Furthermore, Selfnamed has an opportunity to start similar cooperations as they have with Sell e.g. with Printify or other platforms that do not have printing equipment but have more advanced designing and integration features and a wide client base. This project can lead to three revenue sources: direct selling, cooperation with other more advanced POD platforms with wide client base that do not have printing equipment, and contract manufacturing of white-labelled cosmetics for other POD manufacturers like Printful which manages all the POD processes by itself. Although the last does not involve Selfnamed, for the SIA Cosmetics Nord and MADARA overall it can turn out to be a very lucrative opportunity. Weaknesses

Compared to its peers, Selfnamed has quite many weaknesses, however, most of these weaknesses can be eliminated if the Company´s demand expectations will materialise. Currently, Selfnamed has no integration possibility with e-commerce platforms and no integrated shipping which puts a relatively heavy burden for fulfilling and sending the products by business customers to their clients manually. The two latter are one of the key success factors for POD manufacturers attracting business clients, thus we believe that the platform will be more utilised for individual orders. Comparing the design features with peers, Selfnamed still has to make designing a product more convenient, for example, introducing 3D visualisation of design or adding more ready to use images, patterns etc. Clients usually like to have all in one place, it simplifies things, thus one competitive advantage for POD manufacturers is to have many types of products in their product assortment. Selfnamed has only a cosmetics category

Internal Factors Strengths (+)

Weaknesses (-)

•

Sustainable product and packaging

•

No integration with ecomerce providers

•

Vertical integration

•

No automatic order shipping

•

Few design features

•

No other products except for cosmetics

External Factors Opportunities (+) •

First mover advantage in cosmetic POD manufacturing

INSTITUTIONAL EQUITIES

Threats (-) •

Replication from other POD providers

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

and we believe that this will be the only category on which Selfnamed will concentrate. As mentioned in the beginning, we consider that all of these weaknesses except for the latter one can and will be eliminated over time if the project shows signs of success. Currently, the cooperation with “Sell” somewhat solves missing integration and drop-shipping.

Threats

which could copy the idea and crush Selfnamed. This could mean that it is much better for SIA Cosmetics Nord to become a certified natural and organic white-labelled cosmetics contract manufacturer for the world’s leading POD manufacturers or providing also printing services to POD platforms like Sell or Printify. We see very good potential in POD certified natural and organic cosmetics but building a strong POD platform will be very difficult if the other leading POD platforms will utilise this idea.

There are a lot more capable POD providers in Latvia and globally,

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

MADARA Cosmetics AS

10th June 2022

Financials

MADARA brands, new innovative product launches using 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 its guidance for 2023. 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 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 and record sales of from EUR 19.37m in 2021 to EUR 36.67m in 2026 growing with CAGR 13.62% for our forecast period.

Revenues MADARA has recorded a significant increase in its revenues over the last five years. During 2017-2021, the total revenues expanded at a CAGR of 27% to reach EUR 19.4m last year. Although Latvia remains an important market for the Company, the growth has been primarily boosted by exports to other EU countries. Finland, Germany, and France are the Company’s largest export markets at this stage and played a significant role in the rapidly growing export volumes of MADARA in recent years. The Company does not disclose the exact breakdown of its sales by export markets, except for Finland occasionally, which in 2020 accounted c.a. 23% of export sales. In its comments, MADARA has stated that regarding the EU markets, apart from its biggest markets Latvia, Finland, Germany, and France, it focuses also on expansion in the Netherlands, the UK, Spain, Sweden, Denmark, Sweden, Belgium and other. In 2021, all other EU countries (excl. Latvia) formed c.a. 65% of the total revenues, up from 60.5% in 2017. 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 and new sales channels and new product launches. The launch of 16 new products in 2021 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 (CAGR of 18%). As noted in this very early stage of Selfnamed, our forecast does not account for it currently, as well the 2023 target is excluding the Selfnamed effect, thus there is a good upside potential for the set revenue target considering potential Selfnamed sales. The sales drivers are expected to be product portfolio expansion, dedicated promotion of direct e-commerce channel, growing existing third-party online shops and concluding new cooperations, opening new physical stores in markets in which MADARA has direct distribution, and also new market penetration. Although the Company sees big potential in the Asian market, due to the slow entry process and increased market uncertainty Company does not strive for this market to be equal to or more significant compared to the EU market. Also, considering the inflation of energy, raw materials and salaries MADARA will review its product pricing likely in 2023 which has to be taken into account for revenue growth. In order to maintain good profitability MADARA most likely will increase the product prices, but due to intense competition in the cosmetics market, the price increase most probably will be aligned with the competition. 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, strong direct e-commerce channel, increasing recognition of

Sales Development by Markets 40

EURm

30 20 10

Europe, excl.Latvia

Latvia

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2018

2017

In order to achieve the target for 2023, the Company will need to noticeably increase its production capacity compared to the 2020 level. At the end of the 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 at least double 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. As discussed in the Russia-Ukraine War Implications section, the warfare has impacted MADARA’s Q1 2022 y-o-y growth. Especially in the eastern EU, consumers are more anxious due to the proximity of warfare and history that is similar to current developments in Ukraine. Also, record-high COVID-19 infection rates in Asia have limited growth in the market. The rest of the EU showed solid growth, and we consider the slight drop in Q1 y-o-y sales in Latvia as the first panic reaction as consumers were turning to first necessity goods including shampoos, soap etc. Also, MADARA conducted much fewer sales campaigns, simply because it was not relevant to society as people were highly concerned about war escalation and focusing on their safety. The current business environment is rather unstable, the COVID-19 and geopolitical developments do leave a limited impact on the Company´s business. Also, consumer purchasing power is under pressure due to a record high inflation in the EU and there are increasing worries of economic recession which is stimulated by central banks’ monetary policy increasing interest rates. Overall, the Company shows good resilience to geopolitical crisis and has shown resilience to the COVID-19 pandemic in the last two years, thus we consider that MADARA will be able to generate growth. However, the growth can be substantially set back by a radically negative change in geopolitical crisis and COVID-19 infection rates leading to new restrictions. Lately, central bank monetary policies target to restrain inflation back to 2% even if that takes putting the economy in recession. This chain effect could also reflect significantly on consumer disposable income and spending, but it is uncertain how much it will take to put inflation under control. Regarding sales by brands, the Company’s exclusive ‘MADARA’ brand generated the majority of revenues in 2021, i.e. 84%. ‘MOSSA’ has been contributing a stable share of c.a. 10% of total revenues for the last five years. The ‘MOSSA’ brand’s future growth is predicated on its affordability and accessibility to the mass market. Nonetheless, we anticipate the ‘MADARA’ brand to dominate the sales mix in the future which also holds better margins. Contract manufacturing’s contribution to total sales has also been stable c.a. 6%, except in 2020 as a result of the pandemic. In 2021, contract manufacturing contribution recovered to c.a. 6% due to post-pandemic momentum and partly new contract manufacturing strategy, that is, the introduc-

Source: MADARA, LHV

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

tion of catalogue with products offered and manufacturing for Selfmade (Selfnamed strategy from 2022). Depending on Selfnamed or contract manufacturing for other POD platforms’ success, the contract manufacturing could potentially constitute a substantial part of total revenues within the next five years.

Sales Distribution by Brands 100% 80% 60% 40% 20% 0% 2017

2018

MADARA

MOSSA

2019

2020

2021

Contract Manufacturing

Source: MADARA

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 has increased its share of revenues due to its demanded anti-age product line. The body skincare products have decreased their slice of sales in recent years except due to increased product releases for other categories. The launch of makeup products in September 2019 affected the breakdown of MADARA’s revenues by product groups significantly in 2020 and 2021 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 reaching c.a. 13% of total revenues in 2021 compared to 12% in 2020 and 3% in 2019. The makeup products are very anticipated by MADARA’s customers and considering the Company’s strategy to expand to almost all sections of the makeup category, we expect the makeup category to be one of the main revenue sources for MADARA in the upcoming years.

to make strong efforts to expand its export markets, taking over direct distribution, and improving 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 4.2m in 2021 and forming over 25.5% of the total costs. Naturally, the material costs also form a substantial portion of expenses, accounting for 20% in 2021 (EUR 3.3m). 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 thirdlargest individual part of its total costs, gradually increasing y-o-y and in 2021 reaching 16.5% of total cost or 14.2%, as a percentage of revenues, in 2021 (EUR 2.75m), increasing by 26% y-o-y and 110% compared to 2019, given the focus on improving e-commerce sales and expanding direct distribution. 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. 7% of the total costs in 2020 and 2021. 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 to rise in step with planned sales increases (except for 2022), especially as the Company intends to widen its market presence in both existing and new markets. Regarding sales costs, we expect them to increase its share of total revenues to 42% and then gradually declining to 40.5% in the forecast period as the Company is expanding its direct distribution in new markets, thus increasing transportation and advertising costs. By using plants capacity close to maximum and achieving economies of scale, the Company should be able to mitigate increase in fixed cost proportion that are caused by inflation.

MADARA's Cost Breakdown (2021) Staff

Sales Distribution by Categories

Materials 100%

25.4%

25.5%

80%

Advertising Depreciation

60%

Sample production 20.0%

40%

Transport

3.8%

20%

16.5%

1.9%

Other

0% 2015

2016

2017

2018

2019

2020

2021 Source: MADARA

Face

Anti-age

Body

Hair

Mother & Baby

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 of MADARA over the past five years that, as a percentage of sales, the amount of COGS has gradually declined, while the proportion of selling expenses, in turn, has increased. The Company continues

INSTITUTIONAL EQUITIES

Profitability MADARA has a solid history of generating profits. The Company has been profitable every year since 2014, from when data is available to 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 onwards, as the new factory enabled the Company 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

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

the Company reached an all-time high in 2020 and 2021. Also, the Company will improve its margins by expanding direct distribution in its main markets in the long term. 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. Periodically closed physical stores and social distancing, in general, boosted the e-commerce channel significantly. As restrictions were gradually loosened in Q1 2022, the share of direct e-commerce dropped 6pp y-o-y to 39%, indicating that although still a significant part of clients prefers e-commerce channels, some customers will switch to physical stores regularly or from time to time. Also, MADARA had a good upper hand having developed a direct e-commerce platform that allowed it to act immediately for change. In 2021, the competition increased with more brands positioning themselves online, thus to increase or maintain e-commerce channel sales, extra advertising costs are incurred. We believe that the Company will be able to increase its direct e-commerce share in the long run which will require investments in a direct e-commerce platform and increased advertising expenses due to increased competition observed in H2 2021. We expect lower e-commerce proportions in short term as a result of loosened COVID-19 restrictions. According to the Company, the product prices are not currently adjusted for inflation. It is unlikely that product prices will be adjusted any time soon this year as business partners usually ask for price adjustments in advance. Considering inflation, this initially seems to significantly lower the profitability, however, the Company has sufficient finished goods and raw material inventories for the coming quarters in this year, thus the price increase of raw materials this year would not affect it. The energy, logistics, and salary inflation still will negatively impact profitability, but the impact should not be significant. 2020 was a very good year for MADARA regarding profitability due to the use of e-commerce channels by customers, also there was no significant inflation in costs. The impact of cost increases for raw materials, logistics, and salaries on profitability can be observed in H2 2021. Further, increased competition in the e-commerce channel required higher advertising expenses. With growing energy, logistics costs, salaries, and increased advertising costs due to increased competition at the end of 2021, we do not expect the Company to reach the 2020 or 2021 profitability level in 2022. We expect gross profitability to improve from 2023 onwards, primarily by growing direct e-commerce channel sales and economies of scale, however, EBITDA margin may recover at a slower pace as we expect that set revenue target and tight competition will require increased advertising costs. In our forecast, in 2026, MADARA will reach a gross margin of 74%, an EBITDA margin of 34.3%, and a net margin of 24.2%, compared to 67.3%, 24.1%, and 18.9% in 2021 respectively.

Gross margin Net margin (RHS) Source: MADARA, LHV

INSTITUTIONAL EQUITIES

2026E

2025E

2024E

2023E

2022E

2021

2020

2019

43 38 32 27 21 16 10

EBITDA margin (RHS)

80 75 70 65 60 55 50 2018

MADARA's Profit Margins

Regarding Selfnamed potential effects on profitability, of course, that depends on the success of Selfnamed, but considering the vertical integration from production to printing and selling, this segment should possess very similar margins to the direct e-commerce channel. Thus, in the long run, if Selfnamed can generate meaningful revenues it should also significantly contribute to MADARA’s profitability. In the short term, we expect that high advertising spending will keep Selfnamed unprofitable, thus also leaving an impact on the Company´s bottom-line profitability. The other scenario is contract manufacturing for other print-on-demand manufacturers, which possess lower margins but could mean more volumes. In either case, in the long-term, we believe that in absolute values, the new project has a good potential to contribute to MADARA’s growth.

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 2021, the total value of the fixed assets was c.a. EUR 2.9m. 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’, ‘MOSSA’ and “Selfnamed”. There are further applications pending. Eventually, protection for the Company’s trademarks will be extended to other countries, based on 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 2019-21, MADARA made long-term investments of over EUR 1.2m on average annually; with a decline to EUR 0.7m in 2020, 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 in 2019 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 in develop-

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Regarding the existing 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 e-commerce, the next big upgrade is planned to be “offer personalisation” based on a customer’s profile. 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 without meaningful capex. The management indicated that the capex would be in a range of EUR 1-2m in 2022 and might remain within the same range afterwards. In 2022, the Company has plans to invest in improving the production process, new equipment for cosmetics line expansion, upgrading the e-commerce platform, and Selfnamed further development. The Selfnamed capex is not currently accounted for in our projections, the amount will certainly depend on the success of the platform, or extent of cooperation with other print-on-demand platforms. If the concept itself will be demanded, MADARA will have to invest in printing capacity. In our projections, we assumed that MADARA would continue to invest in product developments and specific new production equipment. Importantly, we expect MADARA to initiate its new plant construction in H2 2023 based on the Company’s indication. Although the existing supply chain bottlenecks and soared material prices put certain risks to planned project schedule and capex. We expect that MADARA in total will invest c.a. EUR 8m in the new plant construction and necessary extra equipment starting from H2 2023 till end of 2025, thus expecting 2.5 years construction period. The investments for new plant are assumed to be equally distributed through periods. All together, we expect average capex reaching c.a. EUR 3.5m per year during our forecast period.

INSTITUTIONAL EQUITIES

MADARA's Capex 6 5 4 EURm

3 2 1 2026E

2025E

2024E

2023E

2022E

2021

2020

2019

0 2018

ment 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 2021, investments totalled to c.a. EUR 1.8m, out of which EUR 0.35m investment was made in the new venture Selfnamed. Also, MADARA continues to regularly invest in R&D and improve its e-commerce platform by making it mobile device compatible. In H2 2021, MADARA’s production team joined the first robots to perform product packaging in primary packaging and transportation boxes. The equipment allows to streamline and speed up manual and monotone operations.

Source: MADARA, LHV

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 2021, the Company had total debt of only EUR 0.03m, all of which is related to finance lease liabilities, while its cash and cash equivalents position amounted to EUR 6.6m. 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 a little over EUR 1m at the end of 2021. 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. MADARA has been generating good operating cash flows that can cover capex for growth at the same time accumulate cash reserves and pay dividends. Considering the construction of a new manufacturing plant, we believe that construction together with capex for continuing business growth and overall maintenance could be rather heavy, even with EUR 6.6m cash reserve, thus we expect the Company to raise half of the necessary construction and other related costs (EUR 4m), as a bank loan for five years with an annual interest rate of 3%. This would mean MADARA’s average debt to equity ratio to be at 10% for our forecast period. Given the potential monetary policy targeting to increase interest rates to put inflation under control, the bank loan interest rates may increase accordingly, thus the debt interest rate could go higher, but we expect this to have a minor effect on MADARA interest coverage. Currently, the Company does not have almost any leverage, thus the increase in base rates will have a very limited effect on the Company’s interest payments.

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%. In line with our previous payout trend expectations, MADARA has announced in its draft resolution of the Annual General Meeting of shareholders to increase the proportion of distribution of

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

INSTITUTIONAL EQUITIES

Dividends Source: MADARA, LHV

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

Pay-out ratio (RHS)

15 2026E

1 2025E

2024E

2023E

2022E

2021

2020

2019

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.

MADARA Dividends and Payout Ratio

EURm

profits and distribute EUR 1.9m in dividends or EUR 0.50 per share (+25% y-o-y). With this dividend payment, the payout ratio is 51.4% and we expect this ratio to be maintained at c.a. 50% for the rest of our forecast period. 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.

10th June 2022

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 the 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-of-the-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 1.1m at the end of 2021. 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. The COVID-19 pandemic accompanied by the Russia-Ukraine war has deepened supply chain disruptions, leading to soaring commodity and energy prices. The monetary policy seeks to increase central bank interest rates to cool down inflation. Overall, these factors have put a shock wave over the stock market with dominating fear of economic recession. This obviously leaves a noticeable impact on peers’ multiples and MADARA’s peer valuation. Currently, implications for MADARA are very limited. We believe that in such uncertain conditions, markets are accounting for the worst-case scenario, thus peer valuation proportion in our total valuation is accounting for highly detrimental risks such as an extensive economic recession. For DCF, we assume MADARA to be rather resilient to geopolitical crisis and its implications and keep a positive outlook in the longterm. However, we account for higher uncertainty and risks by applying additional company risk premium. 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

INSTITUTIONAL EQUITIES

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 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 sustainable enterprise in Latvia by Green Dot three times.

•

The Company manufactures certified organic and natural skincare 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 international 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 foundational 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 legislation.

•

The Company has strict governance policies in place.

•

In 2021, MADARA joined the Business Sustainability Council of Latvia, which unites companies from various industries with the goal of exchanging knowledge, increasing public awareness of sustainability, and creating a more sustainable business environment in Latvia.

Taking these various factors about the Company into consideration, we believe that it should rank strongly in terms of ESG policies and reporting 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

TARTU MNT 2, 10145 TALLINN, ESTONIA

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10th June 2022

MADARA Cosmetics AS

term average debt-to-equity ratio of 0.1x and a tax rate of 0%.

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 normalised equity risk premium of 5.1% in our calculations.

DCF Assumptions: 2.50%

Market risk premium

5.10%

•

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 an effective tax rate, but calculated expected tax costs based on estimated dividends during the forecast period.

•

Terminal growth – We assumed a conservative stable growth rate of 3.0% for the terminal growth.

WACC 11.8%

12.3%

12.8%

13.3%

13.8%

2.1%

23.99

22.56

21.29

20.15

19.12

18.19

17.33

2.4%

24.65

23.15

21.81

20.61

19.53

18.55

17.66

2.7%

25.37

23.77

22.35

21.09

19.95

18.93

18.00

3.0%

26.14

24.44

22.94

21.60

20.41

19.33

18.36

3.3%

26.98

25.16

23.56

22.15

20.89

19.76

18.74

13.3%

3.6%

27.88

25.94

24.24

22.74

21.40

20.21

19.14

3.0%

3.9%

28.86

26.78

24.96

23.36

21.95

20.70

19.57

Country Risk Premium

1.2%

Size Premium

3.9%

Add.comp.risk premium

1.5% 10.0%

Terminal sales growth

0.0%

Terminal EBIT margin

0.0%

Terminal growth rate

11.3%

0.82

WACC

Cost of debt – An estimated long-term average of 3.0% was used as an effective interest rate.

10.8%

Levered Beta

Cost of debt

•

Sensitivity of DCF value to changes in assumptions (EUR)

Risk free rate

Cost of equity

Company-specific risk premium – To capture size premium and other risks like earnings volatility, execution risk, and other operational risks, we have used a size premium of 3.9% and an additional company risk premium of 1.5%.

Based on these assumptions, we calculated a DCF-based value of MADARA’s total equity of EUR 81.46m or EUR 21.6 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.

Levered beta – We used the household and personal products sector median unlevered Vasicek Adjusted five-year beta of 0.75 to calculate a levered beta of 0.82 for MADARA, based on a long-

Share of debt

•

12.3% Source: LHV

Source: LHV

DCF valuation, EURm

2022E

2023E

2024E

2025E

2026E

EBIT

3.9

5.4

6.7

8.2

9.9

Taxes

(0.5)

(0.4)

(0.6)

(0.7)

(0.9)

0.9

1.2

1.9

2.5

2.7

Capex

(1.8)

(3.6)

(5.2)

(2.0)

Change in NWC

(1.0)

(0.8)

(0.9)

(0.4)

(0.0)

FCFF

1.6

1.8

1.9

4.4

9.6

Discounted FCFF

1.5

1.4

3.0

5.7

Non-cash charges

Term

61.7

74.8

Net debt + adjustments

(6.7)

Equity value

81.5

Equity value per share (EUR)

21.6

Source: LHV

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Peer Valuation For the peer valuation, we selected 17 listed cosmetics companies and bifurcated them into 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. In calculating a peer implied fair value range, we multiplied the harmonic mean multiples of P/E and EV/EBITDA ratios with our net profits and EBITDA expectations for 2022-2024, respectively. We gave 20% weight to the value derived from Group 1 peers’ harmonic mean multiples and 80% weight to value derived from Group 2 peers’ harmonic mean multiples. As can be observed from the table, the peer comparison ended up with a broad spectrum of values, ranging from EUR 14-22 per share. P/E (x)

EV/EBITDA (x)

Bloomberg ticker

Market Cap EURm

2022E

2023E

2024E

2022E

2023E

2024E

MSONA SS Equity

164

14.4

11.5

10.2

8.9

7.3

6.8

VLG LN Equity

9.8

n.a.

5.9

n.a.

BWX LTD

BWX AU Equity

142

14.2

10.5

8.7

7.3

5.6

4.9

MCPHERSON'S LTD

MCP AU Equity

13.5

11.1

10.1

7.1

5.8

5.4

973 HK Equity

4,107

21.2

16.5

14.3

10.7

9.5

8.8

14.2

11.3

10.1

7.3

6.6

6.1

Company Group 1 MIDSONA AB - A SHS VENTURE LIFE GROUP PLC

L'OCCITANE INTERNATIONAL SA Median Average

14.6

12.4

10.8

8.0

7.0

6.5

Harmonic Mean

13.8

12.0

10.5

7.7

6.7

6.2

Quartile 1

13.5

10.9

9.8

7.1

5.7

5.3

14.4

12.7

11.2

8.9

7.9

7.3

Quartile 3 Weight applied to Group 1 multiples

20%

Company size discount applied to Group 1 peers

Group 2 EMAMI LTD

HMN IN Equity

2,345

26.8

23.9

21.0

18.9

17.4

15.6

L'OREAL

OR FP Equity

176,070

32.0

29.5

27.1

20.5

19.0

17.6

ESTEE LAUDER COMPANIES-CL A

EL US Equity

79,541

31.9

28.0

25.2

20.0

18.0

16.2

4452 JT Equity

17,949

20.7

18.3

17.0

10.0

9.2

8.7

BEI GY Equity

24,071

29.5

27.1

24.5

14.1

13.1

11.9

090430 KS Equity

7,244

34.1

26.5

23.0

11.8

10.2

9.7

KAO CORP BEIERSDORF AG AMOREPACIFIC CORP

COTY US Equity

5,102

23.5

19.7

15.9

11.0

10.2

9.5

SHISEIDO CO LTD

4911 JT Equity

15,718

46.9

28.6

22.5

17.1

12.6

11.1

KOSE CORP

4922 JT Equity

5,020

35.3

27.0

22.8

16.2

12.9

11.2

POLA ORBIS HOLDINGS INC

4927 JP Equity

2,551

23.4

22.9

20.0

11.9

9.7

9.1

INTER PARFUMS INC

IPAR US Equity

2,211

23.7

21.8

19.2

14.0

12.6

10.5

ELF US Equity

1,128

29.0

26.8

24.7

16.9

15.3

14.0

29.2

26.7

22.6

15.1

12.7

11.2

COTY INC-CL A

ELF BEAUTY INC Median Average

29.7

25.0

21.9

15.2

13.3

12.1

Harmonic Mean

28.4

24.5

21.4

14.4

12.6

11.5

Quartile 1

23.7

22.6

19.8

11.9

10.2

9.7

32.5

27.3

24.6

17.6

15.8

14.4

40%

30%

40%

30%

3.4

4.9

6.0

4.8

6.6

8.6

Quartile 3 Weight applied to Group 2 multiples

80%

Company size discount applied to Group 2 peers

30%

Weight applied to different periods Respective financials for Madara (EURm) Implied equity value based on disc. median multiple (EURm)

64.1

79.3

84.0

53.2

62.3

72.5

Implied equity value per share

17.0

21.0

22.3

14.1

16.5

19.2

Source: Bloomberg, LHV

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

MADARA Cosmetics AS

10th June 2022

Valuation Summary

new ones. With nearly 15 years of experience, 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 2022 and 30% each to 2023 and 2024 values. Considering that the peer group companies are much larger, the market shock wave, and the distinct qualities of MADARA in the industry, 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 decrease our fair value range for the stock from the previous EUR 23.80-26.30 to EUR 19.5-21.6 per share.

Considering the COVID-19 pandemic, given the relatively large and stable 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. Still, heavy restrictions observed in Q1, due to rapidly increasing COVID-19 infection rates are cutting back on market growth observed in Asia. Furthermore, the geopolitical crisis is putting pressure on sales growth, especially in Eastern Europe, but overall the Company has shown resilience in the rest of the EU markets. The COVID-19 pandemic accompanied by the geopolitical crisis has deepened supply chain disruptions, causing inflationary pressures. Consequently, due to prolonged high inflation rates,the soaring Consumer Price Index is exceeding average salary increase, pressuring consumer purchase power. Furthermore, factors like market competition and business partner contracts are limiting prompt product price adjustments to increased energy, logistics, and salary costs, thus pressuring the Company’s profitability. Although the personal care sector is rather resilient to crisis, due to these factors there is an increased risk exposure to sales growth and profitability, thus we account for additional company risk premium that together with overall market sentiment towards peers is decreasing our fair value range.

In sum, MADARA is well-positioned to become one of the leading European brands 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 more than double 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 forecasted growth rates, 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 Weighted Value Per Share, EUR Method

Period weights 2022E

2023E

2024E

Period weighted value

Weights

Contribution to value

15%

2.5

40%

30%

EV/EBITDA

14.1

16.5

19.2

16.4

P/E

17.0

21.0

22.3

19.8

15%

3.0

21.6

70%

15.1

DCF Total weighted value per share

20.5

Source: LHV

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

MADARA Cosmetics AS

10th June 2022

Key Risks

rates and severe movement restrictions in Asia are leaving a negative impact on market growth. Strong e-channels are likely to offset the negative impact of partial or full potential temporary closures of shopping centres or cosmetics stores in target markets.

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. 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. COVID-19 Risk: Although the world has adapted to live amongst coronavirus, it continues to have implications for the business environment. As observed in Q1 2022, rapidly increasing COVID-19

INSTITUTIONAL EQUITIES

Geopolitical Risk: Although the Company neither has a significant market in Russia, Ukraine, and Belarus nor there are direct supply chain impacts, the economic ties have been ruptured by both sided sanctions coming from Russia and Europe that are driving inflation and burdening customer purchase power, changing product basket preference, and pressuring companies’ profitability. The extent of warfare and sanction reinforcement directly or indirectly leaves a negative impact on the EU economy and thus MADARA’s main markets. The stress is more observed in Eastern EU markets, but the Company has been rather resilient to crisis. There is a growing concern of economic recession due to disruptions in supply chains, soaring inflation, and rising central bank interest rates, the sales dynamics could to some extent correlate with general economic trends. Although in the 2020 economic slowdown, MADARA reached one of the highest sales growth rates in the last five years, this geopolitical crisis is different and most likely the governments will not intervene with support measures as it was during the COVID-19 crisis peak.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Financial Tables Income Statement (EURm) Revenues Production costs

2017

2018

2019

2020

2021

2022E

2023E

2024E

2025E

2026E

7.40

9.53

11.55

16.07

19.37

22.28

27.00

30.80

34.05

36.67

(2.75)

(3.48)

(4.46)

(5.22)

(6.31)

(7.58)

(8.37)

(9.24)

(9.53)

Gross profit

4.65

6.05

7.08

10.86

13.06

14.71

18.63

21.56

24.52

27.13

Sales costs

(2.32)

(3.55)

(4.50)

(6.29)

(7.72)

(9.36)

(11.34)

(12.78)

(13.96)

(14.85)

Administrative costs

(1.08)

(1.12)

(1.29)

(1.22)

(1.52)

(1.69)

(2.16)

(2.39)

(2.64)

(2.75)

0.19

0.17

0.26

0.44

0.38

0.44

0.48

0.51

0.53

0.56

Other operating income

(0.08)

(0.07)

(0.08)

(0.25)

(0.18)

(0.19)

(0.20)

(0.21)

(0.22)

Operating profit

Other operating costs

1.35

1.47

1.48

3.53

4.03

3.91

5.42

6.69

8.24

9.87

Depreciation & Amortization

0.42

0.52

0.71

0.73

0.68

0.94

1.20

1.89

2.52

2.72

EBITDA

1.77

1.99

2.18

4.27

4.70

4.85

6.62

8.59

10.76

12.59

Financial income

0.00

0.06

0.11

0.06

0.00

(0.03)

(0.02)

(0.03)

(0.01)

(0.00)

(0.06)

(0.11)

(0.08)

(0.06)

1.33

1.52

1.56

3.56

4.01

3.91

5.36

6.59

8.15

9.81

Financial expenses Pre-tax profit Income tax

(0.16)

(0.00)

(0.12)

(0.35)

(0.47)

(0.43)

(0.62)

(0.75)

(0.93)

Deferred income tax

0.07

Net profit

1.25

1.52

1.56

3.45

3.67

3.44

4.93

5.97

7.40

8.88

Nr of shares (m)

3.75

3.77

EPS

0.33

0.40

0.42

0.91

0.97

0.91

1.31

1.58

1.96

2.36

Dividends paid

0.20

0.34

0.45

0.56

1.51

1.89

1.72

2.46

2.98

3.70

DPS

0.05

0.09

0.12

0.15

0.40

0.50

0.46

0.65

0.79

0.98

2017

2018

2019

2020

2021

2022E

2023E

2024E

2025E

2026E

0.14

0.38

0.68

0.67

1.11

1.36

0.73

1.06

1.33

1.26

Source: MADARA for historicals, LHV for estimates

Balance Sheet (EURm) Assets Intangible assets Fixed assets

1.66

2.06

2.24

2.25

2.91

3.50

6.56

9.54

11.95

11.32

0.48

0.45

0.38

Machinery and equipment

0.75

0.86

1.09

Other fixed assets

0.40

0.50

0.65

0.55

Construction in progress

0.01

0.24

0.02

0.03

0.01

0.00

0.03

0.20

0.04

0.07

0.08

Leased fixed assets

Advance payments for fixed assets Long term financial assets Subsidiaries Other securities and investments Other long-term receivables

0.00

0.04

0.07

0.08

Total non-current assets

1.84

2.48

2.99

2.98

4.10

4.95

7.37

10.68

13.36

12.66

Inventory

1.63

2.09

2.98

4.22

4.33

5.03

5.79

6.60

6.85

6.68

Raw materials and consumables

0.86

1.04

1.56

2.00

Finished goods

0.67

0.88

1.20

1.67

Advance payment for goods

0.10

0.17

0.23

0.55

1.06

1.15

1.78

1.33

1.68

2.15

2.50

2.87

3.13

3.37

0.92

0.99

1.35

1.21

1.46

1.94

2.29

2.66

2.92

3.16

Other receivables

0.10

0.11

0.37

0.09

0.19

Prepaid expenses

0.03

0.05

0.06

0.04

0.03

0.02

Total receivables Trade receivables Amounts owed by public debts

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Balance Sheet (EURm)...continued

2017

2018

2019

2020

2021

2022E

2023E

2024E

2025E

2026E

Short-term fin. Investments

0.50

0.70

0.95

Cash and cash equivalents

4.09

3.43

2.33

5.65

6.60

6.34

10.32

8.87

9.43

14.48

Total current assets

7.28

7.36

8.04

11.20

12.61

13.52

18.62

18.34

19.41

24.52

Total assets

9.12

9.85

11.03

14.19

16.71

18.47

25.99

29.02

32.77

37.18

Share capital

0.37

0.38

Share premium

4.02

Other reserves

1.61

2.52

3.58

4.58

6.52

8.30

10.02

12.49

9.50

5.80

Equity and Liabilities Equity

Retained earnings Net profit for the period

1.25

1.52

1.56

3.45

3.67

3.44

4.93

5.97

13.37

22.26

Total equity

7.25

8.43

9.55

12.43

14.59

16.14

19.35

22.86

27.28

32.46

Bank Borrowings

0.24

0.11

0.01

4.00

3.20

2.40

1.60

Other liabilities

0.18

0.14

0.08

0.03

0.00

Deferred income-Current

0.15

0.06

Total non-current liabilities

0.57

0.31

0.09

0.03

0.00

4.00

3.20

2.40

1.60

Bank Borrowings

0.14

0.10

0.01

Liabilities

Deferred tax liabilities

Advances from customers

0.08

0.02

0.05

0.08

0.07

0.10

0.12

0.14

0.16

0.17

Trade payables

0.54

0.36

0.50

0.63

0.94

1.10

1.27

1.30

1.27

Related party debt

State social insurance contributions

0.12

0.10

0.15

0.16

0.30

Other liabilities

0.16

0.18

0.21

0.25

0.26

0.35

0.39

0.44

0.47

0.49

Deferred income

0.09

0.06

0.02

0.03

0.04

Unpaid previous year dividend Accrued liabilities

0.17

0.21

0.32

0.61

0.53

0.61

0.69

0.77

0.82

0.86

Total current liabilities

1.29

1.11

1.39

1.73

2.12

2.32

2.63

2.96

3.09

3.12

Total liabilities

1.87

1.41

1.48

1.76

2.12

2.32

6.63

6.16

5.49

4.72

Total equity and liabilities

9.12

9.85

11.03

14.19

16.71

18.47

25.99

29.02

32.77

37.18

2017

2018

2019

2020

2021

2022E

2023E

2024E

2025E

2026E

Source: MADARA for historicals, LHV for estimates

Cash Flow Statement Summary (EURm) Operating Activities

1.33

1.52

1.56

3.56

4.01

3.91

5.36

6.59

8.15

9.81

0.41

0.46

0.61

0.55

0.46

0.94

1.20

1.89

2.52

2.72

Other non-cash adjustments

(0.34)

(0.27)

(0.25)

(0.26)

(0.52)

(0.47)

(0.49)

(0.72)

(0.83)

(0.98)

Net change in working capital

0.06

(0.64)

(0.89)

(0.54)

0.01

(0.98)

(0.81)

(0.86)

(0.38)

(0.04)

1.46

1.07

1.03

3.30

3.97

3.40

5.27

6.90

9.46

11.51

Net profit Depreciation and amortisation

Net operating cash flow Investing Activities Purchase of PPE and intangibles

(0.44)

(1.14)

(1.19)

(0.73)

(1.80)

(1.78)

(3.62)

(5.20)

(2.02)

Net change in financial investments

(0.50)

(0.20)

(0.50)

1.20

0.01

0.00

0.06

0.09

0.06

0.00

(0.94)

(1.28)

(1.60)

0.53

(1.79)

(1.78)

(3.62)

(5.20)

(2.02)

Other Net investing cash flow Financing Activities Net proceeds/redemtion of debt and leases

(0.22)

(0.19)

(0.16)

(0.06)

4.00

(0.80)

Dividends paid

(0.20)

(0.34)

(0.45)

(0.56)

(1.51)

(1.89)

(1.72)

(2.46)

(2.98)

(3.70)

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE

10th June 2022

MADARA Cosmetics AS

Cash Flow Statement (EURm) ...continued

2017

2018

2019

2020

2021

2022E

2023E

2024E

2025E

2026E

Change in capital

3.32

Net other financing items

0.09

0.08

0.11

0.21

0.34

0.00

0.06

0.11

0.08

0.06

Net financing cash flow

2.99

(0.45)

(0.53)

(0.51)

(1.22)

(1.88)

2.34

(3.16)

(3.70)

(4.44)

Total change in cash

3.51

(0.66)

(1.10)

3.32

0.95

(0.26)

3.99

(1.45)

0.56

5.05

Cash and cash equivalents at beginning of the year

0.58

4.09

3.43

2.33

5.65

6.60

6.34

10.32

8.87

9.43

Cash and cash equivalents at end of the year

4.09

3.43

2.33

5.65

6.60

6.34

10.32

8.87

9.43

14.48

Source: MADARA for historicals, LHV for estimates

Main Ratios

2017

2018

2019

2020

2021

2022E

2023E

2024E

2025E

2026E

26.3

28.7

21.2

39.2

20.5

15.0

21.2

14.1

10.5

7.7

Gross profit growth

40.1

30.1

17.1

53.3

20.3

12.6

26.7

15.7

13.7

10.7

EBITDA growth

33.5

12.9

9.4

95.4

10.2

3.1

36.6

29.7

25.3

17.0

Operating profit growth

44.6

9.1

0.1

139.5

13.9

(2.9)

38.6

23.5

23.0

19.8

Net profit growth

55.2

21.7

3.1

120.4

6.5

(6.3)

43.4

21.1

24.0

20.0

Growth, % Sales growth

Margins and profitability, % Gross margin

62.9

63.5

61.4

67.5

67.4

66.0

69.0

70.0

72.0

74.0

EBITDA margin

23.9

20.9

18.9

26.5

24.3

21.8

24.5

27.9

31.6

34.3

Operating margin

18.3

15.5

12.8

22.0

20.8

17.5

20.1

21.7

24.2

26.9

Net margin

16.8

15.9

13.5

21.4

18.9

15.4

18.3

19.4

21.7

24.2

Return Ratios Capital Employed (EUR m) ROCE (%)

7.9

8.9

9.8

12.5

14.6

16.2

23.4

26.1

29.7

34.1

23.8

17.6

15.8

31.7

29.7

25.4

27.4

27.1

29.5

30.9

ROE (%)

24.6

19.3

17.4

31.4

27.2

22.4

27.8

28.3

29.5

29.7

ROA (%)

18.3

16.0

15.0

27.3

23.7

19.5

22.2

21.7

24.0

25.4

0.62

0.44

0.25

0.09

0.03

4.03

3.23

2.43

1.63

Leverage Debt, EURm Debt/Equity ratio, x

0.1

0.0

0.2

0.1

(3.97)

(3.68)

(3.03)

(5.56)

(6.57)

(6.31)

(6.29)

(5.64)

(7.0)

(12.8)

Net gearing, x

(0.5)

(0.4)

(0.3)

(0.4)

(0.5)

(0.4)

(0.3)

(0.2)

(0.3)

(0.4)

Net debt/EBITDA, x

(2.2)

(1.8)

(1.4)

(1.3)

(1.4)

(1.3)

(1.0)

(0.7)

(1.0)

Z-Score

11.4

15.2

14.6

28.7

32.9

26.6

11.2

11.9

12.8

14.3

3.75

3.77

Net debt, EURm

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

7.50

7.95

7.85

19.80

27.75

24.00

Mkt. Cap (EURm)

28.1

29.8

29.4

74.6

104.6

90.5

Enterprise Value (EURm)

24.1

26.1

26.4

69.1

98.1

84.2

EV/Revenue, x

3.3

2.7

2.3

4.3

5.1

3.8

3.1

2.7

2.5

2.3

EV/EBITDA, x

13.6

13.1

12.1

16.2

20.9

17.4

12.7

9.8

7.8

6.7

P/E, x

22.5

19.6

18.8

21.7

28.5

26.3

18.4

15.2

12.2

10.2

P/BV, x

3.9

3.5

3.1

6.0

7.2

5.6

4.7

4.0

3.3

2.8

Dividend Yield (%)

0.7

1.1

1.5

0.8

1.4

2.1

1.9

2.7

3.3

4.1

Source: MADARA for historicals, LHV for estimates

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LHV.EE

10th June 2022

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.

Altman Z-Score

1.2 multiplied by (working capital divided by total assets) plus 1.4 multiplied by (retained earnings divided by total assets) plus 3.3 multiplied by (earnings before interest and tax divided by total assets) plus 0.6multiplied by (market value of equity divided by total liabilities) plus 1.0 multiplied by (sales divided by total assets)

Source: LHV * To calculate EV for forward multiples we used the market capitalisation as of 9th June 2022 while used the latest reported data (31st Dec 2021) for net debt, investment in associates, and minority interest.

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10th June 2022

MADARA Cosmetics AS

Contacts: Contacts: Ivars IvarsBergmanis Bergmanis

Sander ValtersDanil Smiltāns

Head Headof ofInstitutional InstitutionalMarkets Markets

Analyst Senior Analyst

Tel: Tel:+372 +372680 6802720 2720

Tel: +372 680 2793 valters.smiltans@lhv.ee

Mob: Mob:+372 +372534 53411114 11114

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: Friday 10th June 2022, 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. 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, HMX1R, LINDA, MDARA, DGR1R, and VIRSI. 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. In October 2021, AS LHV Pank was the Global Lead Manager for the IPO of AS DelfinGroup on Nasdaq Riga. AS LHV Pank has made an arrangement with AS Delfin-Group (‘DelfinGroup’), whereby LHV’s research analysts independently produce research reports on DelfinGroup and provide them to DelfinGroup for the purposes of providing more information about DelfinGroup to investors who are not customers of LHV. AS LHV Pank is also a market maker for the shares of DelfinGroup. In November 2021 AS LHV Pank was the Global Lead Manager for the IPO of AS Hepsor on Nasdaq Tallinn. LHV Pank has made an arrangement with AS Hepsor, whereby LHV’s research analysts independently produce research reports on Hepsor, and provide them to Hepsor, for the purposes of providing more information about Hepsor, to investors who are not customers of LHV. In November 2021, AS LHV Pank was the Global Lead Manager for the IPO of Virši-A (‘VIRSI’) on A to Nasdaq First North Riga. AS LHV Pank has made an arrangement with VIRSI, whereby LHV’s research analysts independently produce research reports on VIRSI and provide them to VIRSI for the purposes of providing more information about VIRSI to investors who are not customers of LHV. AS LHV Pank is also a market maker for the shares of VIRSI. LHV is also the certified adviser for VIRSI on Nasdaq Baltic First North on an ongoing fee-based arrangement. In November 2021, AS LHV Pank was the Global Lead Manager for the private placement of the first (EUR 3m) tranche of a EUR 10m bond programme for SIA CrossChem and subsequent admission to trading on Nasdaq First North Riga. AS LHV Pank has made an arrangement with CrossChem,

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whereby LHV’s research analysts independently produce research reports on CrossChem and provide them to CrossChem for the purposes of providing more information about CrossChem to investors who are not customers of LHV. LHV is also the certified adviser for CrossChem on Nasdaq Baltic First North on an ongoing fee-based arrangement. In December 2021, AS LHV Pank was the Global Lead Manager for the IPO of TextMagic on Nasdaq First North Tallinn. AS LHV Pank has made an arrangement with TextMagic, whereby LHV’s research analysts independently produce research reports on TextMagic and provide them to TextMagic for the purposes of providing more information about TextMagic to investors who are not customers of LHV. 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. 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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

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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 30.09.2021 LHV has issued recommendations, of which 27.8% have been ‘Buy recommendations’, 21,5% as ‘Neutral’, 21.5% as ‘Sell’ and 29.1% as ‘under review’. Of all the ‘Buy recommendations’ issued, 31.8% have been for companies for which LHV has provided investment banking services in the preceding 12-month period. Of all the ‘Neutral recommendations’ issued, 17.6% 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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