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MADARA Cosmetics AS Annual Review

27th July 2020


27th July 2020

MADARA Cosmetics AS

Table of Contents Investment Summary

1

Sector Overview

2

Company Overview

3

MADARA Cosmetics Group

3

Shareholders

4

Management

4

History

5

Research and Development

6

Manufacturing

6

Raw Materials

6

Products

6

Brands

7

Certification and Standards

8

Main Markets

8

Distribution Channels

8

Financials

9

Revenues

9

Cost Structure

9

Profitability

10

Non-Current Assets

10

Investments

11

Debt position

11

Dividends

11

Valuation

12

ESG Considerations

12

Discounted Cash Flow

12

Peer Valuation

14

Valuation Summary

14

Financial Tables

INSTITUTIONAL EQUITIES

16

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

Investment Summary

Company Profile

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

2017

2018

2019

2020E*

2021E*

2022E*

7.4

9.5

11.5

13.5

15.7

18.0

Sales growth (%)

26.3

28.7

21.2

16.7

16.8

14.4

Net profit (EURm)

1.2

1.5

1.6

1.7

2.0

2.4

0.33

0.40

0.42

0.46

0.53

0.63

Sales (EURm)

EPS (EUR) P/E (x)

22.5

19.6

18.8

19.4

16.9

14.1

Payout per share (EUR)#

0.05

0.09

0.12

0.15

0.18

0.26

Payout yield (%)

0.7

1.1

1.5

1.7

2.1

3.0

P/B (x)

3.9

3.5

3.1

3.1

2.8

2.5

EV/Sales (x)

3.2

2.7

2.3

2.2

1.9

1.7

EV/EBITDA (x)

13.5

13.0

12.0

12.0

10.1

8.6

EV/EBIT (x)

17.7

17.6

17.8

17.9

14.3

11.7

ROE (%)

24.6

19.3

17.4

17.0

17.4

18.7

Source: MDARA, LHV *2020E-2022E multiples are based on the share price (24th July 2020) of EUR 8.90 per share. #Payout per share include dividends and share capital reduction.

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INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

MDARA LR

ISIN:

LV0000101624

Industry:

Consumer Goods

Sector:

Personal & Household Goods

No. of Employees: Website:

142 www.madaracosmetics.com

Share Data, as of 24th July 2020 Current Share Price (EUR):

8.90

Fair Value Range (FVR), EUR:

8.60-9.40

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

1.12

52-week High/Low (EUR):

8.95/6.50

3m Avg. Daily Volume (th):

0.11

Market Cap (EURm):

33.33

Ordinary Shares (m):

3.75

Key Shareholders, as of 31st Dec 2019 Uldis Iltners

24.08%

Lote Tisenkopfa-Iltnere

23.92%

Oy Transmeri Group AB

23.09%

Zane Tamane

7.61%

Liene Drāzniece

6.83%

12-Month Price Performance 9.0

EURm

MADARA Cosmetics AS (hereafter referred to as ‘MADARA’ or the ‘Company’), based in Latvia, is a leading, fast-growing producer of organic cosmetics and skincare products. It was founded in 2006 and has already established a firm position in the Baltic and Finnish markets, with an increasing presence in other countries. MADARA is on track to become a leading European brand in natural and organic cosmetics. The Company’s underlying strengths include developing its own unique cosmetics and skincare formulae, its ECOCERT certification, and its in-house design and PR agency. It operates out of modern, state-of-the-art facilities close to the Riga International Airport. The scalability of the production capacities is another strength of MADARA. According to the management estimates, the production volume could easily be doubled or even tripled with the existing capacity, without any substantial capital expenditure (‘capex’), by increasing the number of shifts and batch sizes. Currently, the Company employs nearly 150 people. MADARA creates, produces, and sells organic skincare products from pure, high-quality organic ingredients sourced from the Nordic region. The Company targets two types of customers through its two brands – 1) ‘MADARA’ is an affordable luxury brand sold primarily through its own stores, premium resellers, and e-stores, and 2) more affordable products come under ‘MOSSA’ brand, which are sold through various distribution channels, such as drug stores. In addition to this, the Company also undertakes contract manufacturing for third parties. The Company already enjoys a strong brand recognition in the Baltic and Nordic regions, with a solid track record in developing and introducing new products to the market. As such, we believe it can capitalise further on that base, increasing its share in existing markets and penetrating new ones. With nearly 15 years of experience, in our view, the accumulated intellectual property, including the value of its brands and trademarks, product formulations, and production specifications play an important role in the whole value creation process of MADARA, although the Company’s intangibles are difficult to quantify at this stage.

First North Baltic Share List

8.0 7.0 6.0

LHV Fair Value Range: EUR 8.60-9.40*

DCF EV/EBITDA P/E 7

8

9

10

11

12

13

* As of 27th July 2020

Relative Valuation (FY20E) Particulars

EV/EBITDA

P/E

MDARA

12.0

19.4

Peer Median

14.6

36.7

LHV.EE


27th July 2020

MADARA Cosmetics AS

In valuing the shares of MADARA, we are following two main valuation methods: 1) an income approach, based on the Discounted Cash Flow (‘DCF’) calculations and 2) a market approach, based on valuation multiples of a peer group of comparable listed companies. We have used the weighted average of values derived from the DCF and peer valuation, applying different weights to each method. Overall, based on our current projections for MADARA and other assumptions, we decided to slightly increase our fair value range (‘FVR’) for the stock from the previous EUR 8.20-9.00 to EUR 8.60-9.40 per share.

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.

Sector Overview

Consumer and retail analysts emphasise that there are three main factors contributing to the growth of the global organic skincare market. These include demand for (a) chemical-free, (b) multifunctional organic skincare 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 which 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.

According to Cosmetics Europe, in 2019, the region’s retail market for cosmetics and personal care was worth EUR 79.8bn. Collectively, Europe’s market is the largest in the world, with Germany (EUR 14.0bn), France (EUR 11.4bn), the UK (EUR 10.7bn), and Italy (EUR 10.5bn) holding the largest market shares, followed by Spain (EUR 7.1bn) and Poland (EUR 4.1bn). 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 2019, over 206,800 people were employed directly, and a further 1.65 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 21.6bn in retail sales in 2019, followed by toiletries (EUR 19.8bn) and hair care products (EUR 14.9bn). Other larger market segments include fragrances/perfumes (EUR 12.3bn) and decorative cosmetics (EUR 11.2bn). Exports of cosmetic products from Europe totalled EUR 23.4bn in terms of trade value during 2019. France and Germany were Europe’s main exporters, together accounting for 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 which 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 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

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INSTITUTIONAL EQUITIES

Taken together, these factors have fuelled the industry’s strong growth over the last decade, making natural and organic cosmetics the most dynamic segment of the global personal care market. 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 compounded annual growth rate (‘CAGR’) of 6.3%. Many researchers indicate even faster growth from a global perspective. For example, according to Grand View Research, the global organic personal care market size was estimated at USD 13.3bn in 2018 and is projected to register a CAGR of 9.4% from 2019 to 2025. While the US was the world’s largest market for natural and organic cosmetics with a turnover of EUR 4.3bn in 2018, Germany ranked as the second in the world and the largest in Europe, with EUR 1.3bn turnover, followed by France (EUR 0.8bn). In terms of sales channels, in Europe, speciality stores dominate the natural and organic cosmetics market. Although their importance is decreasing, they still accounted for 38% of sales in 2018, ahead of pharmacies and drugstores (33%). General retailers accounted for 7% of sales of natural and organic cosmetic products, while other retail channels (perfumery shops, hairdressing salons, beauty salons, online sales, etc.) account for 23% of total sales.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

MADARA plans to benefit from the powerful market trends. Besides its domestic market, Latvia, the Company’s core markets include Northern European countries, where demand is high for quality organic products as people in this region have high disposable incomes and more advanced online shopping habits. This does not in any way preclude efforts in other European countries, though a focus closer to home is natural in the short term, with further opportunities identified over the longer term. One of the main markets for MADARA is Finland, where the trend towards natural beauty and personal care products is becoming more mainstream. The use of natural products first emerged with smaller, organic, and premium brands, though it is now spreading to more widely used products. Natural ingredients have featured in the vast majority of new product launches, including those from leading mass brands, such as Unilever and L’Oréal. Competition is therefore intensifying, with several other international best-selling, naturally-positioned brands with innovative ingredients entering the Finnish market in recent years. Skincare, haircare, and makeup are widely using organic care products, collectively accounting for nearly four-fifths of the global organic personal care and cosmetic products market. The cosmetics industry is highly competitive, with the skincare segment set to remain the dominant part, accounting for nearly one-third of the market by 2022. According to many research reports, a larger, ageing population is helping drive growth in this segment, feeding off increased demand for natural and organic anti-ageing creams, moisturisers, and body lotions. Consumers perceive natural and organic products to be safer and of higher quality, with oils from natural sources such as argan, marula, almond, aloe vera, and coconut proving to be particularly popular ingredients for organic skincare products. For a variety of reasons, consumers are seeking ways of embracing a more natural lifestyle, a trend that also applies to cosmetics. Those with the money are moving away from mass-produced items towards those marketed as a part of a healthier, wellness-oriented lifestyle. This is a worldwide trend based on a preference for organic products that have been developed ethically and in an environmentally friendly way through the entire value chain. The visibility given to organic skincare products by the entry of large multinationals to the segment has generated additional demand and accessibility. Therefore, retailers who promote product quality, transparency, and sustainability are doing better than ever. Sustainability as a concept is growing in importance – consumers are becoming more aware of the term and show a preference for products manufactured under its principles: using renewable energy, recyclable packaging, and locally sourced ingredients. In response, the major brands operating in the industry are altering their products mixes, shifting the types of their ingredients used and acquiring natural skincare brands. The main advantages for the larger market players are that they produce natural cosmetics with advanced formulas at a lower cost. However, the higher costs of smaller manufacturers and, therefore, higher prices seem to have relatively little effect on consumer preferences, as they are willing to pay a premium for natural cosmetics. The rise of the individual consumer is an important trend underlying the shift in consumption patterns. After scientific research started highlighting the damage inflicted on the skin by environmental factors (radiation, free radicals and the like), antioxidants were hyped as potential offsets. This gave rise to the trend of using plants that contain very high concentrations of powerful antioxidants in skin creams. The key to success on the market seems to be in combining multiple antioxidants to provide the fullest spectrum of protection possible. Active players in the market invest in research and development to introduce innovative products. These are sold mostly through supermarkets, brand outlets, department stores, drug stores, pharmacies, non-store retail formats, and concept stores. These traditional retail

3

INSTITUTIONAL EQUITIES

channels still dominate the global cosmetics market. However, increasing rates of internet penetration worldwide, together with ease of availability and attractive discounts, has led to a growing preference of consumers to buy through the online sales channel. This trend should give a further boost to online sales of organic personal care and cosmetic products in the coming years. It is estimated that e-commerce formed 12-13% of the global beauty market in 2018. For many companies, online sales has become the channel of choice, allowing them to increase market penetration, consumer reach, and expand their consumer base. Therefore, while demand for organic cosmetics is growing, the customer’s interaction and experience, using diagnostic tools and digital apps, as well as electronic payments and delivery, are also transforming the industry. For e-commerce sales, retailers must continue to invest in omnichannel presence, bundling together retail, online, and mobile app stores with 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.

Company Overview

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

MADARA Cosmetics Group The MADARA Cosmetics group is made up of several companies. AS MADARA Cosmetics is the parent company responsible for the development, manufacturing, and sale of organic cosmetic products under two brands: ‘MADARA’ and ‘MOSSA’. MADARA Cosmetics has three fully owned subsidiaries: MADARA Retail SIA, Cosmetics NORD SIA, and MADARA Cosmetics GmbH. MADARA Retail SIA manages four MADARA brand stores in Riga, located in shopping centres – “Galerija Centrs”, “Spice”, “Alfa”, and “Akropole”. The newest store in “Akropole” was launched in April 2019. In 2019, MADARA Retail SIA generated revenues of EUR 0.94m (+28% y-o-y), accounting for nearly a third of the Company’s total sales in Latvia. Cosmetics NORD SIA is focused on rendering contract manufacturing services using the production infrastructure and capacity of MADARA, with sales amounting to EUR 0.6m in 2019, down 15% y-o-y. However, the management claims that Cosmetics NORD SIA attracted several new customers last year as well as performed development of several new products for contract manufacturing customers. MADARA Cosmetics GmbH provides cosmetics marketing services in Germany and organises the distribution of MADARA products in that market. Also, there is a 19% minority shareholding in SIA Farmācijas, biomedicīnas un medicīnas tehnoloģiju kompetences centrs and a 9% holding in SIA Pharma and Chemistry Competence Centre of Latvia. Both facilities have been formed within the framework of the state aid programme ‘Competence Centres’, being implemented

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

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.

Shareholders As at the end of 2019, MADARA had a total of 3,745,242 shares outstanding, with the nominal value of EUR 0.10 each. The Company is effectively controlled by Mr Iltners and Mrs Tisenkopfa-Iltnere, who are spouses and exercise their voting rights jointly. With the combined ownership of 48.0%, these two shareholders jointly exercise a significant degree of influence over the Company. Other larger shareholders include Oy Transmeri Group AB, Mrs Zane Tamane, and Mrs Liene Drāzniece. The latter two were among the founders of the Company back in 2006. Oy Transmeri Group AB (‘Transmeri’) is a Finnish family-owned company mostly engaged in importing and distribution of 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. MADARA shareholders (31st Dec 2019)

14.47% 6.83%

24.08%

7.61% 23.92% 23.09%

Uldis Iltners

Lote Tisenkopfa-Iltnere

Oy Transmeri Group AB

Zane Tamane

Liene Drāzniece

Other

Source: MADARA

Management The operational management of the Company is structured as a regular two-tier system, comprising of the management board and supervisory board. The management board is responsible for the day-to-day management of the Company’s operations and is authorised to represent the Company based on the applicable laws and the Articles of Association. The supervisory board of the Company is the supervisory body representing the interests of the shareholders in general meetings and exercising oversight over the activities of the management board. Supervisory Board According to the Articles of Association, the supervisory board consists of five members who are appointed by the General Meeting for five years. Currently, the composition of the supervisory board is as follows: Zane Tamane, Anna Ramata-Stunda, Anna Andersone, and Liene Drāzniece. As the Company received the notification from the fifth member of the supervisory board, Anu Pauliina Koskinen, about leaving the board as of 30th June 2020, the supervisory board currently comprises four members until the AGM on 28th July 2020. According to the agenda of the AGM, it is proposed to recall Zane Tamane from the supervisory board and elect two new members to

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INSTITUTIONAL EQUITIES

the board – Edgars Pētersons and Sari Hannele Rosin. Zane Tamane – Chairman of the supervisory board. Born in 1981. She is proposed to be recalled at the next AGM. Graduated from the Stockholm School of Economics in Riga in 2003, with a bachelor’s degree in economics, specialising in the field of marketing. Before co-founding MADARA in 2006, she worked in two international advertising agencies – McCann and Lowe – as a Brand Strategist for major Latvian brands. Anna Ramata-Stunda – Member 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 a board member and co-founder of the company SIA InCell, which provides biotechnology and research services. Ms RamataStunda is the co-author of many scientific publications, as well as holds several patents. Liene Drāzniece – Member 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. 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. Edgars Pētersons – Proposed to be elected as Member of the supervisory board at the next AGM. 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 – Proposed to be elected as Member of the supervisory board at the next AGM. Born in 1972. She graduated from the South Carelian Business School in 1997, with a bachelor’s degree in business and economics. She is the CEO of Oy Transmeri Ab, a subsidiary of Oy Transmeri Group Ab and the market leader in Finland for many cosmetics categories, e.g. natural organic cosmetics. Oy Transmeri Group Ab is a strategic shareholder of MADARA with a 23.1% stake. She is also the CEO of Oy Sultrade Ltd, a sister company of Oy Transmeri Ab, importing, selling, and marketing wellknown sports brands in Finland and the Baltics. Since April 2020, she is the Chairman of the board in Finnish Cosmetic and Detergent Association.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

Management Board The management board comprises of 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 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.

He graduated from the BA School of Business and Finance in 2003 with a bachelor’s degree in business management and leadership. Before co-founding MADARA in 2006, he worked as the CEO and analyst at an IT consulting firm providing computer simulation assisted production controlling and optimisation for manufacturing companies. He is a board member of SIA Wolf Candles, SIA “MC Properties”, and SIA Kalvi. Paula Tisenkopfa – Member of the management board. Born in 1988. She graduated from the University of Latvia with a bachelor’s degree in philosophy. Ms Tisenkopfa co-founded the Group in 2006, and since then she has been actively involved in sales and export expansion, as well as in the areas of product and brand development. Currently, Ms Tisenkopfa’s main areas of responsibility are human resources and matters of corporate governance.

Uldis Iltners – Member of the management board. Born in 1983.

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

5

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.

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

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

Manufacturing MADARA has been manufacturing on an industrial-scale since 2008, from when it has strictly produced all of its products and had complete control of every stage of the manufacturing process. In late 2015, the Company completed the development and trial production phase of a new factory, which has been fully commissioned since February 2016. While the two production sites continued operating in parallel for some months, by September 2016 all production had moved to the new site. The new factory is built in a way that the production can be scaled upwards easily. The Company estimates that using existing equipment, it would have the capacity to double or triple current production volumes by increasing the number of shifts and batch sizes. There is also room to accommodate more equipment, allowing for even greater expansion. 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. With its extra production capacity, the Company, under the Cosmetics NORD subsidiary, offers contract manufacturing to third parties. It has developed a reputation as a reliable supplier of certified manufacturing services for high quality, modern natural skincare, hair care and baby care formulae. Contract manufacturing customers are offered a range of readymade formulae already tested in the market that can be quickly adjusted to meet their specific needs. Alternatively, the Company is able to source and incorporate specifically selected ingredients and perform research to develop completely new formulations. This has been a growing business line for the Company, especially within the non-domestic market. The Company has around ten contract manufacturing clients, most of whom are

6

INSTITUTIONAL EQUITIES

located in Scandinavia, operating in the hospitality, fashion, and food supplements industries. It is believed that this business line will assist the Company’s expansion in foreign markets.

Raw Materials MADARA prides itself on using pure, high-quality ingredients - c.a. 400 natural ingredients to formulate and make cutting-edge, effective cosmetic products. Many of the 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 on 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 80 different cosmetic products, including facial cleansers, toners, moisturisers, masks, serums, facial oils, eye- and lip-care products, soap bars, liquid soaps, body moisturisers, deodorants, shampoos, conditioners, as well as products for babies and children. While the primary target of these products is for the 25+ age group, certain product lines are designed for all ages and some for children. MADARA undergoes extensive research when creating and choosing a product. For example, the ‘Time Miracle’ product line, the world’s first anti-ageing skincare product based on birch water, has been proven to reduce the signs of ageing. According to the Company, birch water accelerates skin cell division by 25%, which can reverse both genetic and environmental ageing. Facial care products, accounting for 58% of the total revenues in 2019, dominate the breakdown of MADARA’s sales by product categories. Other larger product groups of the Company include body care (15%) and anti-age (13%) products, followed by hair care products (10%). The newly launched products affected the breakdown of MADARA’s revenues by product groups for the last year. Following the introduction of functional hair products in Q1 2019, the portion of hair care products grew by 3pp last year compared to 2018. Although the Company launched the new makeup line only at the end of September 2019, makeup products formed c.a. 3% of full-year sales. Therefore, we assume that the makeup line had a good start and formed over 10% of the total sales in Q4 2019, allowing us to

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

expect more positive developments in the coming years. The Company stated that, by the end of 2019, the makeup line was launched in Latvia, Finland, Germany, and France, receiving positive feedback and market response. In 2020, MADARA plans to launch the sales of makeup in several new countries, and rapidly expand in the countries where the new products have already been launched, anticipating the new segment to form 7-10% of sales this year, with a gradual increase in the following years.

Sales breakdown by product category (2019) 3%

1%

10%

13% 58%

Brands

15%

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

Face

Body

Anti-age

Hair

Make-up

Mother & Baby

Source: MADARA

Brand

‘MADARA’

‘MOSSA’

Brand positioning statement

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

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

Brand USP

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

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

Target audience

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

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

Positioning and price range

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

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

Retail channels

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

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

Competitors

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

Source: MADARA Cosmetics

7

INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

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

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. It has high brand recognition, consumer loyalty (87% of customers say that they buy its products regularly), and average annual growth of nearly 20% for the last three years (2017-2019). In 2019, the Company’s net sales in the Latvian market amounted to EUR 3.1m (+15% y-o-y), with c.a. one-third of this being generated through its own physical stores. Originally MADARA gained popularity as a local, sustainable skincare manufacturer, but is now a wellknown story of successful Latvian entrepreneurship. Finland is one of the Company’s first and largest export markets, with 2019 net sales in the country of EUR 2.5m, contributing c.a. 22% of the total 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 beauty scene. 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 wellknown Finnish natural lifestyle advocate, journalist and blogger, Noora Shingler. This cooperation includes regular launches of co-branded products, activities in the media (including social

8

INSTITUTIONAL EQUITIES

media) and events. Together with Noora Shingler, MADARA has launched several new products in Finland, all of which have been among the best-sellers. MADARA has strong connections with Oy Transmeri Group AB (‘Transmeri’), one of the largest cosmetics and personal care products importer and wholesaler 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. Unfortunately, the Company does not disclose the breakdown of its sales by the EU countries. In its comments, MADARA has stated that regarding the EU markets, apart from Latvia and Finland, it focuses mostly on expansion in Germany, Netherlands, UK, Spain, and France. 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.

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

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

Financials

to generate sales growth by effectively exploiting all sales channels.

Revenues Partly driven by the extra capacity offered by the new fac-

tory constructed in 2015, MADARA has recorded a significant increase in its revenues over the last few years. During the period from 2015 till 2019, total revenues of MADARA expanded at a CAGR of 30.7% to reach EUR 11.6m last year. Although Latvia remains an important market for the Company, the growth has been primarily boosted by exports to other EU countries. Finland is the Company’s largest export market at this stage and played a significant role in rapidly growing export volumes of MADARA in recent years, accounting for c.a. 22% of the total sales in 2019. Unfortunately, the Company does not disclose the exact breakdown of its sales by export markets. In its comments, MADARA has stated that regarding the EU markets, apart from Latvia and Finland, it focuses mostly on expansion in Germany, Netherlands, UK, Spain, and France. In 2019, all other EU countries (excl. Latvia) formed over 65% of the total revenues, up from 59% in 2015. The management said that the solid growth rates over the past years are achieved mainly due to the steady development of the Company’s existing sales channels and expanding product selection. Looking forward, the launch of the new organic makeup line and further widening of export markets and distribution channels should contribute to steady growth in sales volumes. Earlier this year, the management repeated its 2020 revenue guidance of EUR 15m, but given the coronavirus related temporary closures of stores and other aspects, we feel this number might be difficult to reach, projecting a more conservative figure of EUR 13.5m for 2020. Although we anticipate MADARA’s revenue growth to slow down gradually in the coming years, the Company is still expected to expand its sales at a CAGR of 14% over the next five years, to reach EUR 22m by 2024. 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 ecommerce platforms, we believe that MADARA is well-positioned for solid growth going forward.

Regarding sales by brands, the Company’s exclusive ‘MADARA’ brand generates the majority of revenues. However, of late, ‘MOSSA’ has begun to contribute an increasing share of revenues on account of the ongoing development of the brand and its increased market penetration. The ‘MOSSA’ brand’s future growth is predicated on its affordability and accessibility for the mass market. Nonetheless, we anticipate the ‘MADARA’ brand still to dominate the sales mix in the future, with ‘MOSSA’ potentially contributing up to 15-20% in the longer run. Sales disribution by brands 100% 80% 60% 40% 20% 0% 2015 MADARA

MOSSA

2018

2019

Contract Manufacturing

Source: MADARA, LHV

Sales distribution by categories 100%

25 20

80%

15

60%

10

40%

5

20%

Europe, excl.Latvia

Latvia

2024E

2023E

2022E

2021E

2020E

2019

2018

2017

2016

2015

0

Others

0% 2015 Face

Anti-age

2016 Body

Source: MADARA, LHV

Source: MADARA, LHV

One of the major positive features of the Company is that its factory is built in a way that the production can be scaled up easily without any substantial investments or fixed costs. The Company estimates that using existing equipment, it has the capacity to double or triple current production volumes by increasing the number of shifts and batch sizes. There is also room to accommodate more equipment, allowing for even greater expansion. Therefore, MADARA’s success depends primarily on strong product developments and its ability

Cost Structure

9

2017

MADARA is best known for its face skincare products, as this segment has consistently generated over half of the Company’s revenues. Anti-ageing creams seem to be losing prominence to those used for facial skincare, while body skincare products have retained a steady slice of sales in recent years. The newly launched products affected the breakdown of MADARA’s revenues by product groups for the last year. Following the introduction of functional hair products in Q1 2019, the portion of hair products grew by 3pp y-o-y to reach 10% in 2019. Although the Company launched the new makeup line only at the end of September 2019, makeup products formed c.a. 3% of the fullyear sales. MADARA expects the new segment to form 7-10% of sales this year, with a gradual increase in the following years.

Sales development by markets

EURm

2016

INSTITUTIONAL EQUITIES

2017 Hair

2018

Mother & Baby

2019 Make-up

Other

The Company’s largest cost items are the cost of goods sold (‘COGS’) and selling expenses. It has been a characteristic for MADARA over the past five years that, as a percentage of sales, the amount of COGS has gradually declined, while the proportion of selling expenses, in turn, has increased. The Company continues to make strong efforts to expand its export markets and improve its e-

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

10

24.1%

28.1%

Gross margin

Non-Current Assets 19.7%

6.6% 12.2%

Staff Depreciation Other

Materials Sample production

Advertising Transport

Source: MADARA

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

Profitability MADARA has a solid history of generating profits. The Company has been profitable every year since 2014, from when data is available with us. Moreover, it has managed to increase annual profits every single year. With the expansion and development of the new factory, the Company improved its gross margins from 2017, as the new factory enabled to rapidly increase production volumes and enhance efficiency. Partly due to substantially increased selling expenses, profit margins of the Company were under pressure in 2019. In 2019, EBITDA margin declined to below 20% mark for the first time since 2016. It is very likely that in relation to the coronavirus pandemic and temporary closures of MADARA’s physical stores in Latvia, the

10

Net margin (RHS)

Source: MADARA, LHV

4.5% 4.9%

EBITDA margin (RHS)

2024E

50

2023E

14

2022E

55

2021E

18

2020E

60

2019

22

2018

65

2017

26

2016

70

%

MADARA's profit margins

2015

MADARA's cost breakdown (2019)

margins may come down further in 2020 or to remain flat at best. However, driven by the expected solid growth rates in sales volumes, along with improvements in production efficiency and economies of scale, we anticipate MADARA to gradually amend its underlying profit margins going forward. The Company has not provided any profit guidance for this year, only reiterating its revenue guidance of EUR 15m recently. Bearing in mind the likely setback in Q2 2020 induced by the coronavirus situation, our full-year revenue forecast is more conservative at EUR 13.5m. We anticipate MADARA to generate EBITDA and net profit of EUR 2.5m and EUR 1.7m, respectively, in 2020. With this sort of profitability, the 2020 ROE could settle at around 17%, with a gradual increase thereafter.

%

commerce platform, leading to a substantial boost in selling expenses. Administrative expenses are relatively small and mostly made up of remuneration of the management. Considering MADARA’s COGS, selling and administrative expenses combined, staff costs constitute the largest individual part in terms of absolute value, amounting to EUR 3.0m in 2019 and forming nearly 30% of the total costs. Naturally, the material costs also form a substantial portion of expenses, though their share in the combined cost structure has somewhat declined over the last two years, accounting for 20.6% in 2019 (EUR 2.1m). Being a relatively new player in the cosmetics sector, MADARA needs to make itself visible, using diversified advertising channels, including different online solutions and social media. Therefore, it is no surprise that advertising expenses form the third-largest individual part of its total costs at 12.2% in 2019 (EUR 1.3m), up from 8.7% in 2017. In addition to advertising, presentation of product samples is an important marketing tool for a cosmetics company, and MADARA has significantly expanded distribution of samples over the last three years, with the respective costs forming c.a. 5% of the total in 2018-2019. Depreciation and amortisation charges have consistently formed c.a. 6-7% of the total cost base in recent years. Transport has normally accounted for c.a. 4-5% of the total costs

INSTITUTIONAL EQUITIES

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 2019, the total value of the fixed assets was c.a. EUR 2.2m. A certain portion of these fixed assets, in addition to inventory and receivables, are pledged in favour of Swedbank to secure the existing loan and credit line agreements. Considering the nature of the Company’s business, all the usual steps have been taken to secure its intellectual property, in particular its brand name, ‘MADARA’, registering it internationally under the Madrid Protocol. Besides, MADARA has over 20 trademarks registered in Latvia, including its most important brand names and trademarks, ‘MADARA’ and ‘MOSSA’. There are further applications pending. Eventually, protection for the Company’s trademarks will be extended to other countries, based upon the management’s assessment of the necessary scope of protection. However, the Company does not hold any patents, utility models or other similarly registered intellectual property. The cosmetic formulae are not protected by patents due to the complications of obtaining a patent and the high

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

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.

Regarding the new factory, it was the largest single development project during 2014-2016, with the 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, vacuum processing unit, 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 management indicated that it plans to reduce the amount of long-term investments in 2020, focusing more on using its existing organisation and resources to develop the Company. Investments made over the past few years significantly increased the overall production capacity of the Company, and according to the management estimates, the production volume can be easily doubled with the current capacity. However, the Company does not exclude the possibility of investing more in new production equipment, depending on the level of growth achieved. Additionally, it does not exclude the possibility of expanding its product or service segments and will invest accordingly. In our projections, we assumed that MADARA would continue to invest in product developments and specific new production equipment. Therefore, we projected the Company’s total capex to expand further in coming years, with the average capex reaching EUR 1.5m per year during our forecast period.

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INSTITUTIONAL EQUITIES

1.2 0.8 0.4

2024E

2023E

2022E

2021E

2020E

2019

2018

2017

2016

0.0

2015

Over the last two years, MADARA made long-term investments in the amount of over EUR 1.1m annually. In 2019, the Company invested c.a. EUR 1.2m, of which about EUR 0.6m was directed into the improvement of production processes. One of the most significant projects of MADARA last year was the development of a new makeup line. Total long-term investment in the makeup development project was nearly EUR 0.5m, including EUR 0.1m development expenses and EUR 0.4m investments into makeup production equipment. During the development phase, MADARA upgraded its production facilities with two new production machines – a reactor for highly pigmented formulations and an automatic makeup filling and capping machine. Apart from the makeup line developments, the Company made investments in several departments for further improvement and automation of processes. Such projects included the implementation of the Business Intelligence tool to improve supply chain management and data analytics; an advanced process of developing new products; and the implementation of a production resource planning system that will allow more efficient planning and utilisation of the existing production resources. In 2018, larger investments of the Company included two new filling and packaging lines, one for automated filling of tubes and the other for automated filling and sealing of vials. Also, MADARA invested in the development of e-commerce system as well as the implementation of IT projects to automate various business processes.

1.6

EURm

Investments

MADARA's Capex 2.0

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 2019, the Company had total debt of only EUR 0.1m, while its cash and cash equivalents position amounted to EUR 3.3m. As of 2019, two small loan agreements were outstanding with Swedbank, with maturities in June 2020 and January 2021, and the interest rate of 3m Euribor +3.3-3.5%. Additionally, it should be noted that the Company acts as a guarantor for the MC Properties SIA borrowings from Swedbank, related to the building the Company operates. The property is pledged in favour of Swedbank. The amount of MADARA’s guarantee is the amount of the outstanding liabilities of MC Properties SIA against Swedbank, standing at EUR 0.6m at the end of 2019. During the last three years, MADARA has 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. In the annual report for 2019, the management claims that the Company sold all its short-term investments profitably in 2020.

Dividends Given the strong financial position of the Company, MADARA has been able to pay a growing amount of dividends each year since 2016, despite its vigorous growth profile. The management proposes to the AGM on 28th July 2020 to pay a dividend of EUR 0.15 per share, distributing a total of EUR 0.56m, which would correspond to a payout ratio of 36% from the last year’s profit. During 2016-2019, the payout ratios have ranged from 25% to 30%. We believe that the Company will continue to gradually increase its dividend payments in the coming years, lifting the payout ratio to at least 50% by 2022. With its net cash position positive, the Company is in a strong position to ensure that it can capitalise on all expansion, development, and investment opportunities that arise without adding financial stress to the business. It should be kept in mind that, from the beginning of 2018, Latvian corporate income tax (‘CIT’) regulations became similar to those effective in Estonia. Legal entities are not paying income tax on earned profits, while tax is instead paid on distributed profits. The profit distributions are subject to a tax rate of 20% of their gross amount, or 20/80 of net dividends. CIT on dividends is recognised in the income statement for the reporting period that the respective dividends are declared. Certain tax exceptions are allowed in case the dividend is paid from profits earned before 2018, already taxed with CIT. We assume MADARA would pay full tax amount on the dividend payments starting from 2021.

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

Dividends

%

0

2024E

0.0

2023E

15

2022E

0.4

2021E

30

2020E

0.8

2019

45

2018

1.2

2017

60

2016

1.6

2015

EURm

MADARA Dividends and Payout Ratio

Pay-out ratio (RHS)

Source: MADARA, LHV

Valuation In this section, we discuss our assumptions and approach in deriving the fair equity value range for the Company. As per our usual practice, we are following two main valuation methods: 1) an income approach, mainly grounded on a value derived from the DCF calculations and 2) a market approach, using guideline public companies method (‘GPCM’), looking at multiples of a peer group of comparable listed companies. We acknowledge that similar to other cosmetics companies, apart from the cash flow generation capabilities, a substantial portion of MADARA’s equity value is driven by its intellectual property, which mostly comprises the value of the brands and trademarks, developed product formulations and production methods. However, it is complicated to put a price tag to the intellectual property of MADARA separately or as a component for the sum-ofthe-parts (‘SOTP’) analysis. Nonetheless, we believe that MADARA’s balance sheet significantly undervalues the potential current market value of its intellectual properties, with total intangible assets standing at only EUR 0.7m at the end of 2019. On the other hand, in our view, the intellectual property value of global cosmetics companies should be reflected in their market multiples, which are notably above the broader market averages. For example, the selected peer companies of MADARA are trading at 2020E median P/E and EV/EBITDA ratios of c.a. 37x and 15x, respectively. Therefore, our peer analysis for the Company partially counts for the additional value arising from the brands and product formulas. In addition, we believe that there is further investor value from an ESG perspective. ESG investments are becoming increasingly valuable, with ESG indices historically outperforming standard indices. It has also been proven that, within the Baltics, Global Compact signatories have in the past outperformed non-signatories. Considering the nature of MADARA’s business, we believe that it would be well-placed within the scope of an ESG company screen. This, as expanded 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

12

INSTITUTIONAL EQUITIES

of studies that have shown a distinct correlation between companies with good ESG practices and a lower cost of capital, reduced stock price volatility, and better valuation over the long term. According to several reports, globally, ESG investing has more than doubled over the past 20 years, with the cumulative value increasing from tens of billions to hundreds of trillions, and the number of investment funds rising from 10s to 1,000s. These fund numbers are likely to continue rising in the future, as investors perceive that businesses that act in a sustainable manner are likely to be more profitable over time and should deliver better returns to shareholders. Besides clearly placing MADARA within the ESG investment universe, there are some other benefits the Company’s policies can generate. From one perspective, companies with good ESG policies and metrics have the potential for lower discount rates. It is becoming increasingly mainstream to perceive a company with good ESG metrics as carrying lower risks. However, there is no real consensus on the degree of ‘rewarding’ a company for good ESG practises, and this is still susceptible to subjectivity. Likewise, the ESG consideration can be taken into account directly as part of the DCF in terms of future cash flow liabilities. However, based on the Company’s reports, it seems unlikely that it faces any significant costs directly related to any ESG matters. As such, there is no need to penalise the valuation for any adverse future ESG-related events. The other means of accounting for a company’s level of ESG responsibility is adjusting the peer multiples when determining a peer implied value. Once again, though, this can be highly subjective in terms of what may or may not be reasonable for an ESG adjustment. Key ESG considerations for MADARA: • The Company has been named the No.1 greenest and most sus-

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

tional 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 leg-

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

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

Discounted Cash Flow The free cash flow to the firm (‘FCFF’) is calculated as the tax-adjusted operating profit, adjusted for capex, working capital investments, and depreciation and amortisation. Main assumptions for the cost of the long-term risk-free rate, sector betas, and equity risk premium, are sourced from the “2017 Valuation Handbook – International

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LHV.EE


27th July 2020

MADARA Cosmetics AS

book, we applied a size premium of 3.4% for MADARA.

Industry Cost of Capital” published by Duff & Phelps. The country risk premium is based on a ratings-based default spread sourced from 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:

• Company-specific risk premium – Mostly due to the small size of

the free float and low liquidity of shares, we applied a companyspecific risk premium adjustment of 1.0%. • Cost of Debt – an estimated long-term average of 4.0% was used

as an effective interest rate.

• DCF model – We have used a three-step DCF model, which

includes 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.

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

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

• Risk-free rate – We used a risk-free rate of 2.5% based on a nor-

malised long-term forecast.

• Terminal growth – We assumed a conservative stable growth

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

rate of 3.0% for the terminal growth.

normalised equity risk premium of 5.1% in our calculations.

Based on these assumptions, we calculated a DCF-based value of MADARA’s total equity of EUR 32.5m or EUR 8.7 per share. We have conducted a sensitivity analysis to assess the impact of changes in terminal growth, and WACC to 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 levered beta of 0.77 for MADARA, based on a debtto-equity ratio of 0.05x and a tax rate of 0%. • Company size premium – Using the guidance from the hand-

DCF Assumptions:

Sensitivity of DCF value to changes in assumptions (EUR)

Risk free rate

2.5%

Market risk premium

5.1% 1.4%

Size Premium

3.4%

Add.comp.risk premium

1.0%

Share of debt

5.0%

Terminal sales growth

3.0%

Terminal EBIT margin

17.0%

Cost of equity

12.2%

Cost of debt

4.0%

WACC

11.8%

Source: LHV

DCF valuation, EURm

10.3%

10.8%

11.3%

11.8%

12.3%

12.8%

13.3%

2.1%

9.72

9.14

8.62

8.16

7.75

7.38

7.04

2.4%

9.97

9.35

8.81

8.33

7.89

7.50

7.15

2.7%

10.23

9.58

9.01

8.50

8.04

7.63

7.27

3.0%

10.52

9.83

9.22

8.68

8.20

7.77

7.39

3.3%

10.84

10.09

9.45

8.88

8.37

7.92

7.52

3.6%

11.18

10.38

9.69

9.09

8.56

8.08

7.66

3.9%

11.55

10.70

9.96

9.32

8.75

8.25

7.81

0.8

Country Risk Premium

Terminal growth rate

Levered Beta

WACC

2020E

2021E

2022E

2023E

2024E

2025E

2026E

2026E

Term

1.7

2.1

2.6

3.1

3.6

3.9

4.2

4.5

4.7

-

(0.2)

(0.2)

(0.3)

(0.4)

(0.4)

(0.5)

(0.6)

(0.7)

0.8

0.9

0.9

1.0

1.2

1.2

1.3

1.4

1.4

Capex

(1.3)

(1.6)

(1.4)

(1.6)

(1.8)

(1.7)

(1.7)

(1.6)

(1.4)

Change in NWC

(0.3)

(0.5)

(0.3)

(0.5)

(0.4)

(0.4)

(0.3)

(0.3)

(0.2)

FCFF

0.9

0.7

1.5

1.7

2.2

2.6

3.0

3.4

3.7

Discounted FCFF

0.8

0.6

1.2

1.2

1.4

1.5

1.5

1.6

19.5

EBIT Taxes Non-cash charges

EV

29.5

Net debt + adjustments

(3.0)

Equity value

32.5

Equity value per share (EUR)

8.7

Source: LHV

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INSTITUTIONAL EQUITIES

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LHV.EE


27th July 2020

MADARA Cosmetics AS

Peer Valuation For the peer valuation, we have focused on 11 listed cosmetics companies, excluding outliers from the average multiple calculations. We acknowledge that all the peers are significantly larger than MADARA, with a global footprint and well-established brand names. Thus, we believe a considerable discount is required for MADARA from the peer multiples. However, MADARA has its own qualities, potentially reducing the relative valuation gap, such as strong growth characteristics, good brand recognition in its home region, as well as ESG considerations. Still, we decided to apply a conservative 30% discount relative to the peer implied range. In calculating a peer implied fair value range, we multiplied the harmonic mean of P/E and EV/EBITDA ratios for our net profits and EBITDA expectations for 2020-2022, respectively. As can be observed from the table, the peer comparison ended up with a broad spectrum of values, ranging from EUR 8.4-11.1 per share.

Valuation Summary 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 2020 and 30% each to 2021 and 2022 values. As the peer

Company L'OREAL ESTEE LAUDER COMPANIES-CL A KAO CORP

group companies are much larger than MADARA, we see the DCF as a more appropriate valuation method for the Company. We have given the DCF valuation a 70% weight in the total value, leaving the peer valuation weight at 30%, including a 15% weight to each of the multiples. Overall, based on our current projections for MADARA and other assumptions, we decided to slightly increase our fair value range for the stock from the previous EUR 8.20-9.00 to EUR 8.609.40 per share. In sum, MADARA is well-positioned to become a leading European brand in natural and organic cosmetics. The Company’s underlying strengths include developing its own unique cosmetics and skincare formulae, its ECOCERT certification, and its in-house design and PR agency. The scalability of the production capacities is another strength of MADARA. According to the management estimates, the production volume could easily be doubled or even tripled with the existing capacity, without any substantial capex, by increasing the number of shifts and batch sizes. Thus, with the right marketing tools and some luck, MADARA is capable of recording much faster growth rates in sales than currently projected, further capitalising on the economies of scale. The Company already enjoys a strong brand recognition in the Baltic and Nordic regions, with a solid track record in developing and introducing new products to the market. As such, we believe it can capitalise on that base, increasing its share in existing markets and penetrating new ones. With nearly 15 years of experience, in our view, the accumulated intellectual property,

P/E (x)

EV/EBITDA (x)

Bloomberg ticker

Market Cap (in EURm)

2020E

2021E

2022E

2020E

2021E

2022E

OR FP Equity

159,845

39.7

35.3

32.5

23.7

21.5

20.0

EL US Equity

61,797

43.6

36.7

31.8

25.7

21.9

19.3

4452 JT Equity

33,948

27.8

25.1

23.3

14.6

13.5

13.0

BEIERSDORF AG

BEI GY Equity

24,555

33.7

28.4

26.0

17.4

15.2

14.2

SHISEIDO CO LTD

4911 JT Equity

22,223

81.1

37.9

31.4

24.5

16.9

15.1

090430 KS Equity

6,907

51.8

29.4

24.3

14.1

10.7

9.4

AMOREPACIFIC CORP KOSE CORP

4922 JT Equity

6,138

24.5

52.6

29.2

12.6

19.1

13.4

POLA ORBIS HOLDINGS INC

4927 JP Equity

3,320

43.7

23.4

21.0

12.0

9.4

8.7

COTY US Equity

2,809

26.9

12.2

9.5

13.4

10.9

10.0

973 HK Equity

2,274

16.7

23.3

16.9

11.2

12.2

10.0

IPAR US Equity

1,230

66.9

30.5

23.7

31.1

15.7

n.a.

COTY INC-CL A L'OCCITANE INTERNATIONAL SA INTER PARFUMS INC Median (Excluding outliers)

36.7

29.4

25.2

14.6

15.2

13.0

Average (Excluding outliers)

37.5

30.0

26.0

18.2

15.2

12.6

Harmonic Mean (Excluding outliers)

32.4

29.1

25.0

16.2

14.1

11.8

Quartile 1

27.4

24.2

22.2

13.0

11.5

10.0

Quartile 3

47.8

36.0

30.3

24.1

18.0

14.8

1.7

2.0

2.4

2.5

3.0

3.5

Implied equity value based on disc. Harm. Mean (EURm)

39.0

40.1

41.5

31.6

32.5

31.9

Implied equity value per share

10.4

10.7

11.1

8.4

8.7

8.5

MADARA ratios (based on FVR midpoint)

19.5

17.0

14.2

12.1

10.2

8.7

Company size discount applied Respective financials for Madara (EURm)

30%

Source: Bloomberg, LHV

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INSTITUTIONAL EQUITIES

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

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. Considering the ongoing coronavirus pandemic, given the relatively Weighted Value Per Share, EUR Method EV/EBITDA P/E

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

Period weights

Period weighted value

Weights

Contribution to value

15%

1.3 1.6

2020E

2021E

2022E

40%

30%

30%

8.4

8.7

8.5

8.5

10.4

10.7

11.1

10.7

15%

8.7

70%

DCF Total weighted value per share Source: LHV

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INSTITUTIONAL EQUITIES

6.1 9.0

TARTU MNT 2, 10145 TALLINN, ESTONIA

LHV.EE


27th July 2020

MADARA Cosmetics AS

Financial Tables Income Statement (EURm) Revenues Production costs

2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

4.20

5.86

7.40

9.53

11.55

13.47

15.74

18.00

20.08

22.10

(1.82)

(2.54)

(2.75)

(3.48)

(4.46)

(5.22)

(6.05)

(6.87)

(7.60)

(8.30)

Gross profit

2.38

3.32

4.65

6.05

7.08

8.25

9.68

11.13

12.48

13.80

Sales costs

(1.47)

(1.86)

(2.32)

(3.55)

(4.50)

(5.22)

(6.02)

(6.79)

(7.48)

(8.12)

Administrative costs

(0.41)

(0.60)

(1.08)

(1.12)

(1.29)

(1.44)

(1.66)

(1.86)

(2.03)

(2.19)

0.04

0.13

0.19

0.17

0.26

0.21

0.23

0.25

0.26

0.26

(0.02)

(0.05)

(0.08)

(0.07)

(0.08)

(0.12)

(0.14)

(0.15)

(0.17)

(0.19)

Other operating income Other operating costs Operating profit

0.51

0.93

1.35

1.47

1.48

1.69

2.11

2.57

3.05

3.56

Depreciation & Amortization

0.16

0.39

0.42

0.52

0.71

0.82

0.88

0.92

1.04

1.16

EBITDA

0.68

1.32

1.77

1.99

2.18

2.51

2.99

3.50

4.09

4.72

Financial income

0.00

0.00

0.00

0.06

0.11

0.03

0.04

0.04

0.05

0.06

(0.03)

(0.02)

(0.03)

(0.02)

(0.02)

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

0.48

0.91

1.33

1.52

1.56

1.72

2.15

2.61

3.10

3.61 (0.35)

Financial expenses Pre-tax profit Income tax

(0.00)

(0.10)

(0.16)

(0.00)

-

-

(0.17)

(0.25)

(0.30)

Deferred income tax

(0.03)

(0.01)

0.07

-

-

-

-

-

-

-

0.45

0.80

1.25

1.52

1.56

1.72

1.97

2.37

2.80

3.26

Net profit Nr of shares (m)

1.07

1.07

3.75

3.75

3.75

3.75

3.75

3.75

3.75

3.75

EPS

0.42

0.75

0.33

0.40

0.42

0.46

0.53

0.63

0.75

0.87

Dividends paid

-

0.12

0.20

0.34

0.45

0.56

0.69

0.99

1.18

1.40

DPS

-

0.11

0.05

0.09

0.12

0.15

0.18

0.26

0.32

0.37

2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

0.01

0.01

0.14

0.38

0.68

0.69

0.66

0.56

0.63

0.70

Source: MADARA for historicals, LHV for estimates

Balance Sheet (EURm) Assets Intangible assets Fixed assets

1.78

1.59

1.66

2.06

2.24

2.75

3.47

4.10

4.60

5.13

Leased fixed assets

0.04

0.54

0.48

0.45

0.45

-

-

-

-

-

Machinery and equipment

1.08

0.85

0.75

0.86

1.09

-

-

-

-

-

Other fixed assets

0.11

0.17

0.40

0.50

0.65

-

-

-

-

-

Construction in progress

0.55

0.00

0.01

0.24

0.02

-

-

-

-

-

Advance payments for fixed assets Long term financial assets Subsidiaries

-

0.01

0.01

0.00

0.03

-

-

-

-

-

0.04

0.04

0.04

0.04

0.07

0.07

0.07

0.07

0.07

0.07

-

-

-

-

-

-

-

-

-

-

Other securities and investments

0.04

0.04

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Other long-term receivables

0.00

0.00

0.04

0.04

0.07

0.07

0.07

0.07

0.07

0.07

Total non-current assets

1.83

1.64

1.84

2.48

2.99

3.51

4.20

4.72

5.29

5.90

Inventory

0.83

1.29

1.63

2.09

2.98

3.07

3.55

4.03

4.46

4.84

Raw materials and consumables

0.46

0.76

0.86

1.04

1.56

-

-

-

-

-

Finished goods

0.29

0.46

0.67

0.88

1.20

-

-

-

-

-

Advance payment for goods

0.08

0.07

0.10

0.17

0.23

-

-

-

-

-

0.85

0.99

1.06

1.15

1.78

2.33

2.63

2.66

2.90

3.12

Trade receivables

0.61

0.90

0.92

0.99

1.35

1.77

2.07

2.10

2.34

2.56

Amounts owed by public debts

0.24

0.04

-

-

-

-

-

-

-

-

-

0.03

0.10

0.11

0.37

0.50

0.50

0.50

0.50

0.50

Total receivables

Other receivables

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27th July 2020

MADARA Cosmetics AS

Balance Sheet (EURm)...continued Prepaid expenses Short-term fin. Investments

2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

0.01

0.02

0.03

0.05

0.06

0.06

0.06

0.06

0.06

0.06

-

-

0.50

0.70

0.95

-

-

-

-

-

Cash and cash equivalents

0.36

0.58

4.09

3.43

2.33

3.81

3.87

4.48

5.08

5.94

Total current assets

2.05

2.85

7.28

7.36

8.04

9.20

10.05

11.17

12.45

13.91

Total assets

3.88

4.49

9.12

9.85

11.03

12.71

14.26

15.89

17.74

19.81

0.11

0.11

0.37

0.37

0.37

0.37

0.37

0.37

0.37

0.37

Share premium

0.76

0.76

4.02

4.02

4.02

4.02

4.02

4.02

4.02

4.02

Other reserves

0.00

-

-

-

-

-

-

-

-

-

Retained earnings

0.89

1.22

1.61

2.52

3.58

4.59

5.62

6.60

7.79

9.19

Equity and Liabilities Equity Share capital

Net profit for the period

0.45

0.80

1.25

1.52

1.56

1.72

1.97

2.37

2.80

3.26

Total equity

2.21

2.89

7.25

8.43

9.55

10.70

11.99

13.37

14.99

16.84

0.51

0.38

0.24

0.11

0.01

0.01

0.01

0.01

0.01

0.01

Other liabilities

0.01

0.05

0.18

0.14

0.08

0.20

0.20

0.20

0.20

0.20

Deferred income-Current

0.32

0.23

0.15

0.06

-

0.07

0.08

0.10

0.11

0.12

Deferred tax liabilities

0.06

0.07

-

-

-

-

-

-

-

-

Total non-current liabilities

0.91

0.74

0.57

0.31

0.09

0.28

0.29

0.30

0.31

0.32

Bank Borrowings

0.14

0.14

0.14

0.14

0.10

0.10

0.10

0.10

0.10

0.10

Advances from customers

0.04

0.03

0.08

0.02

0.05

0.10

0.12

0.13

0.15

0.16

Trade payables

0.28

0.25

0.54

0.36

0.50

0.61

0.71

0.81

0.89

0.97

Liabilities Bank Borrowings

Related party debt State social insurance contributions

-

-

-

-

-

-

-

-

-

-

0.03

0.11

0.12

0.10

0.15

0.18

0.20

0.22

0.24

0.26

Other liabilities

0.08

0.11

0.16

0.18

0.21

0.26

0.30

0.34

0.37

0.40

Deferred income

0.09

0.09

0.09

0.09

0.06

0.11

0.13

0.15

0.17

0.19

-

-

-

-

-

-

-

-

-

-

Unpaid previous year dividend Accrued liabilities

0.10

0.14

0.17

0.21

0.32

0.36

0.42

0.47

0.52

0.56

Total current liabilities

0.76

0.86

1.29

1.11

1.39

1.73

1.98

2.22

2.44

2.64

Total liabilities

1.67

1.61

1.87

1.41

1.48

2.01

2.27

2.52

2.76

2.97

Total equity and liabilities

3.88

4.49

9.12

9.85

11.03

12.71

14.26

15.89

17.74

19.81

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

0.48

0.91

1.33

1.52

1.56

1.72

2.15

2.61

3.10

3.61

0.16

0.38

0.41

0.46

0.61

0.82

0.88

0.92

1.04

1.16

Source: MADARA for historicals, LHV for estimates

Cash Flow Statement (EURm)

2015

Operating Activities Net profit Depreciation and amortisation Other non-cash adjustments

(0.15)

(0.12)

-0.34

-0.27

-0.25

0.10

-0.18

-0.26

-0.31

-0.38

Net change in working capital

(0.09)

(0.57)

0.06

-0.64

-0.89

-0.24

-0.56

-0.29

-0.47

-0.42

0.40

0.61

1.46

1.07

1.03

2.41

2.29

2.99

3.35

3.97

(1.27)

(0.11)

(0.44)

(1.14)

(1.19)

(1.35)

(1.57)

(1.44)

(1.61)

(1.77)

Net change in financial investments

0.05

(0.00)

(0.50)

(0.20)

(0.50)

0.95

-

-

-

-

Other

0.00

0.00

0.00

0.06

0.09

0.03

0.04

0.04

0.05

0.06

(1.21)

(0.12)

(0.94)

(1.28)

(1.60)

(0.36)

(1.53)

(1.40)

(1.56)

(1.71)

0.46

(0.14)

(0.22)

(0.19)

(0.19)

-

-

-

-

-

Net operating cash flow Investing Activities Purchase of PPE and intangibles

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

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27th July 2020

MADARA Cosmetics AS

Cash Flow Statement (EURm) ...continued

2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

Dividends paid

(0.05)

(0.12)

(0.20)

(0.34)

(0.45)

(0.56)

(0.69)

(0.99)

(1.18)

(1.40)

Change in capital

-

-

3.32

-

-

-

-

-

-

-

Net other financing items

0.39

(0.02)

0.09

0.08

0.11

(0.00)

(0.00)

(0.00)

(0.00)

(0.00)

Net financing cash flow

0.80

(0.28)

2.99

(0.45)

(0.53)

(0.57)

(0.69)

(0.99)

(1.19)

(1.40)

(0.01)

0.22

3.51

(0.66)

(1.10)

1.48

0.06

0.60

0.61

0.86

Cash and cash equivalents at beginning of the year

0.37

0.36

0.58

4.09

3.43

2.33

3.81

3.87

4.48

5.08

Cash and cash equivalents at end of the year

0.36

0.58

4.09

3.43

2.33

3.81

3.87

4.48

5.08

5.94

2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

Sales growth

38.7

39.7

26.3

28.7

21.2

16.7

16.8

14.4

11.6

10.0

Gross profit growth

39.5

39.6

40.1

30.1

17.1

16.4

17.4

15.0

12.1

10.6

EBITDA growth

12.4

96.1

33.5

12.9

9.4

15.1

18.8

17.0

16.9

15.4

Operating profit growth

5.2

82.0

44.6

9.1

0.1

14.5

24.8

22.1

18.6

16.6

Net profit growth

9.1

79.3

55.2

21.7

3.1

10.0

14.8

19.9

18.3

16.3

Total change in cash

Source: MADARA for historicals, LHV for estimates

Main Ratios Growth, %

Margins and profitability, % Gross margin

56.7

56.7

62.9

63.5

61.4

61.2

61.5

61.8

62.1

62.4

EBITDA margin

16.1

22.6

23.9

20.9

18.9

18.7

19.0

19.4

20.4

21.3

Operating margin

12.2

15.9

18.3

15.5

12.8

12.5

13.4

14.3

15.2

16.1

Net margin

10.7

13.7

16.8

15.9

13.5

12.8

12.5

13.1

13.9

14.7

Return Ratios 2.9

3.4

7.6

8.7

9.7

10.8

12.1

13.5

15.1

17.0

ROCE (%)

Capital Employed (EUR m)

21.3

29.9

24.5

18.1

16.1

16.5

18.4

20.1

21.4

22.2

ROE (%)

22.5

31.5

24.6

19.3

17.4

17.0

17.4

18.7

19.8

20.5

ROA (%)

14.2

19.2

18.3

16.0

15.0

14.5

14.6

15.7

16.7

17.4

0.65

0.51

0.38

0.24

0.11

0.11

0.11

0.11

0.11

0.11

0.3

0.2

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Leverage Debt, EURm Debt/Equity ratio, x

0.29

(0.06)

(4.21)

(3.88)

(3.17)

(3.70)

(3.76)

(4.37)

(5.0)

(5.8)

Net gearing, x

Net debt, EURm

0.1

(0.0)

(0.6)

(0.5)

(0.3)

(0.3)

(0.3)

(0.3)

(0.3)

(0.3)

Net debt/EBITDA, x

0.4

(0.0)

(2.4)

(1.9)

(1.5)

(1.5)

(1.3)

(1.2)

(1.2)

(1.2)

Valuation Shares O/s (m)

3.75

3.75

3.75

3.75

3.75

3.75

3.75

3.75

Share Price (EUR)

7.50

7.95

7.85

8.90

8.90

8.90

8.90

8.90

Mkt. Cap (EUR m)

28.1

29.8

29.4

33.3

33.3

33.3

33.3

33.3

Enterprise Value (EUR m)

23.9

25.9

26.2

30.2

30.2

30.2

30.2

30.2

EV/Revenue, x

3.2

2.7

2.3

2.2

1.9

1.7

1.5

1.4

EV/EBITDA, x

13.5

13.0

12.0

12.0

10.1

8.6

7.4

6.4

P/E, x

22.5

19.6

18.8

19.4

16.9

14.1

11.9

10.2

P/BV, x

3.9

3.5

3.1

3.1

2.8

2.5

2.2

2.0

Dividend Yield (%)

0.7

1.1

1.5

1.7

2.1

3.0

3.5

4.2

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TARTU MNT 2, 10145 TALLINN, ESTONIA

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27th July 2020

MADARA Cosmetics AS

Key Definitions/Formulas ROE

Net profit divided by average equity book value

ROCE

EBIT divided by average capital employed

ROA

Net profit divided by average total assets

EPS

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

BVPS

Equity book value divided by year end number of shares

Net debt

Total financial debt less cash and cash equivalents

P/E

Corresponding share price divided by earnings per share

P/BVPS

Corresponding share price divided by book value per share

EV/Sales*

Enterprise value divided by sales

EV/EBITDA*

Enterprise value divided by EBITDA

EV/EBIT*

Enterprise value divided by EBIT

Net gearing

Net financial debt divided by total equity

Debt/Equity

Total financial debt divided by total equity

Enterprise value

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

Market Capitalisation

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

Source: LHV * To calculate EV for forward multiples we used the market capitalisation as of 24th July 2020 while used the latest reported data (31st Dec 2019) for net debt, investment in associates, and minority interest.

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MADARA Cosmetics AS

Contacts: Ivars Bergmanis

Sander Danil

Head of Institutional Markets

Senior Analyst

Tel: +372 680 2720

Tel: +372 680 2793

Mob: +372 534 11114

sander.danil@lhv.ee

ivars.bergmanis@lhv.ee

All images are sourced from https://www.madaracosmetics.com Date and time of sign-off: Monday 27th July 2020, 17:00

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 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. LHV is the Certified Adviser of Madara Cosmetics, on an ongoing fee-based arrangement. MADARA is listed on the NASDAQ Baltic First North List. LHV is also the certified adviser for LINDA on NASDAQ Baltic First North on an ongoing fee-based arrangement. AS LHV Pank has made an agreement with EfTEN Capital AS 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. In October 2019, AUGA group has selected AS LHV Pank as an advisor as well as arranger and manager for the contemplated bond issue. The first tranche of these bonds were issued and listed at the end of 2019. LHV was engaged as co-manager for the private placement of new units for Baltic Horizon Fund, announced in February 2019. LHV has also been engaged to explore capital raising possibilities for Valmieras Stikla Skiedra. LHV was the global coordinator for the Coop IPO in December 2019. LHV’s Group acts as a market maker /(and)/ liquidity provider for TKM1T, APG1L, TVEAT, OLF1R, HMX1R, LINDA, and MDARA. All reports are produced by LHV’s research department. In order to proactively prevent conflicts of interest, LHV has established several procedural and physical measures. Such measures include, among other things, confidentiality measures through separation, or so-called “Chinese walls”, virtual and physical barriers to limit the exchange of information between different departments, groups or individuals within LHV Group. These measures are monitored by the compliance department of LHV. LHV does everything possible to avoid the conflict of interests but it cannot guarantee that conflict of interests situations do not arise at all. LHV provides coverage on this company on a regular basis, therefore this report may include assumptions and findings laid out in greater detail elsewhere. If interested, clients may approach LHV for these previous reports. This report is based upon information available to the general public. The information contained within has been compiled from sources deemed to be suitably reliable. However, no guarantee to that effect is given and henceforth neither the accuracy, completeness, nor the timeliness of this information should be relied upon. Any opinions expressed herein reflect a professional judgment of market conditions as at the date of publication of this document and are therefore subject to change without prior notice. LHV reviews its estimates at least once during financial reporting period and upon most major financial events. The report is not intended for public distribution and may not be reproduced, redistributed or published in any form whatsoever (in whole or in part) without prior written permission of LHV. The user shall be liable for any non-authorised reproduction or use of this report, whether in whole or in part, and such reproduction may lead to legal proceedings. LHV does not accept any liability whatsoever for the actions of third parties in this respect. This information may not be used to create any financial instruments or products or any indices.

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MADARA Cosmetics AS

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

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

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

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

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LHV.EE

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