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Lodge Partners says EZZ could be worth $1 from its current price of $0.42, as the company’s brands start to get recognition in China and global markets.
Lodge Partners has maintained its Buy rating for EZZ Life Science (ASX:EZZ), while increasing its price target from $0.84 to $1.00.
This new target price reflects a huge implied upside of 138% from current share price levels, with the upgrade coming as the broker updated its investment thesis on EZZ following a strong first half.
During the half, EZZ’s revenue grew by 143% on pcp to $15.13m, driven by higher-than-normal share of revenue from its higher-margin EZZ-branded products, as well as renewed sales into China.
Increased sales of EZZ owned branded products have resulted in gross margins increasing to 74% (from 48% in the pcp).
Because of that, EZZ generated a strong bottom line – with EBITDA of $1.81m (vs +$1.74m on pcp), and NPAT of $1.30m (vs +$1.20m on pcp) for the half, with EPS significantly increasing from $0.24 to $3.04.
While this was a strong performance for EZZ, Lodge Partners expects both revenue growth and gross margin to normalise going forward.
“We have therefore conservatively kept our revenue growth assumptions to around 20%, based on forward estimates on compounded annual growth for revenue as a result of new product innovations and new distribution channels globally,” said the broker’s note.
Lodge Partners has also adjusted EZZ’s forward-looking gross margin forecasts to circa 60% (from 74%). Nevertheless, the broker has increased its price target on EZZ from 84c to $1.
H1 FY23 proved to be a strong period for EZZ, as it banked its second straight half year of strong growth, following Covid-related challenges that plagued the company in previous periods.
Significantly, not only did EZZ substantially grow its revenues, it also was able to materially shift its revenue mix towards its higher-margin EZZ branded products,
Nine new products were introduced as management focused on promoting its EZZ-branded products on multiple distribution channels into China.
The new products included Bone Growth Chews, Men’s Performance, Incontinence Relief, Joint Energy Boost, Brain Focus, High Strength DHA and Luminescence Beauty.
EZZ also participated in the world’s largest online shopping event, Alibaba Group’s 11.11 Global Shopping Festival in China, achieving sales of $2.56m at the 1-day event, an 8-fold increase on the previous year.
The company was also an exhibitor at China’s largest pharma show, PharmChina, which was attended by 100,000 industry professionals, and also showcased its products at three international expos in Turkey and Singapore.
Participation in these events further improved both sales and awareness of EZZ-branded products, which the company says could be used as a springboard to further sales growth.
From a cashflow perspective, EZZ reported customer cash receipts increasing by over 100% during the period to $14.6m.
Importantly, the company maintained its cash reserves of $9.59m at the end of the period,
Lodge Partners said it has come up with a $1 fair price valuation based on a discounted cash flow model (DCF) utilising a WACC of 11.53% and terminal growth rate of 2%.
“Our model conservatively forecasts top line revenue growth of around 20% over coming years, and a long-term gross margin of around 60%,” said the broker.
The model has also priced in an increased marketing and advertising expenses as a percentage of total revenue going forward.
This reflects the strong rebound in marketing activities on the company’s distribution partner platforms in China, as well as in other existing channels and new markets.
During the last half, there was a strong focus on promoting EZZ products across its sales channels, particularly through the use of influencers on the new Douyin and Tmall platforms.
Going forward, EZZ has said it will continue to investigate options to launch onto more platforms globally as well as more direct-to-consumer engagement methods.
“Based on the above, we maintain our BUY recommendation on EZZ, increasing our price target from $0.84 to $1.00, reflecting an implied return of circa 138% from current levels,” said Lodge Partners.
This article was developed in collaboration with EZZ Life Science, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.