Equity firm ASR Wealth has outlined several growth opportunities for EZZ Life Science Holdings as it continues its acceleration into a fully integrated life sciences company.

A comprehensive report by equity firm ASR Wealth Advisors has found EZZ Life Science Holdings’ (ASX:EZZ) stock price should be valued much higher, considering they could untap significant earnings growth on the back of higher sales revenue and improved margins through expansion of its product range.

While at the time of writing their report EZZ shares were at 53 cents, ASR placed an implied share price up ~64% at 87 cents.

Established just three years ago, after an over-subscribed public offering, EZZ listed on the ASX in March.  While ~20 drug, device and diagnostic outfits have listed on the ASX since the start of 2020, EZZ has defied the trend of many struggling to maintain momentum during difficult COVID-19 economic conditions.

According to ASR and its FY21 annual report, EZZ is in a solid financial position with growing revenue and gross margins.  The company has net assets of around ~$10 million and ~$8.9m cash with minimal low debt figures.  Revenue increased by 29% to $22.3m from FY20 to FY21 with profit margins up from 5.26% to 8.33% during the same period.

 

Strategic move to direct-to-consumer

The company’s operational strategy moved away from the distribution of EAORON branded products and toward more of an emphasis on expanding EZZ branded products, which were launched in March 2020.

The report said, in the short-term this move may see revenue (from EAORON branded products) take a hit since the distribution model has been a larger part of the company revenue, however, in the longer-term it will help improve operating margins.

The report highlighted as a strength development of EZZ branded products, which have gross margins in the 80% range.

The report further said: “Expanding the product range in the EZZ consumer health segment could untap significant earnings growth for the business on the back of higher sales revenue as well as improved margins, while also decreasing the company’s historical dependence on the EAORON brand.”

 

Attending to risk factors

There were several key risks outlined in the ASR report which EZZ have addressed.

Although relatively fragmented, the report named several competitors as the large brands capturing most of the market share with significant scalability.

EZZ has also mentioned in its most recent annual report that increased investments in R&D  is a part of their strategic plan. ASR said R&D into leading edge ingredients, which would be protected by intellectual property/patenting, could provide significant longer-term opportunities for EZZ.

Reliance on distributors, with five key customers comprising 89.2% of total FY20 revenue for EZZ was also presented as a key risk.

ASR noted management’s move to diversify its customer base with its top three customers comprising only 25%  of revenue in FY21. It  said “the business can further de-risk its earnings and improve its overall resilience by continuing to diversify its customer base through building relationships with a wider range of retailer customers”.

Enforcement of strict TGA laws as well as tensions between China and Australia relations was also seen as risk factors,  along with demand for new products being lower than anticipated.

The report said the expansion into new markets, including into Southeast Asia, as a priority could “generate significant earnings growth for the business while also diversifying its geographic exposures and hence de-risking its earnings mix”.

The report noted that there is a risk that consumer demand could be weaker than expected.

However,  the report found the business “utilises a dynamic new product development process that is underpinned by rich data analytics and ongoing market research, enabling EZZ to offer high quality, differentiated goods that are designed to best fulfil customer needs.”

“This consumer led approach gives EZZ the ability to pivot in response to feedback and changing consumer preferences.”

 

New markets supported by omni-channel marketing

EZZ has invested heavily in its marketing capability. ASR said positioning the business as a genuine omni-channel business through increasing its exposure to third party e-commerce platforms and developing an in-house site that sells its range direct-to-customer “could offer sizeable benefits to sales volumes and margins”.

“Moreover, an improved online footprint would help mitigate risks to EZZ’s earnings associated with the structural shift from ‘brick and mortar’ retail to online shopping,” the report said.

The report noted marketing and correct pricing was critical for the launch of any new product line.

“Market research shows that between 20-30% of products sold are those which have been ‘launched recently’ (PriceBeam), with large marketing budgets dedicated to promoting these new products, and thus correct pricing is essential,”  the report said.

 

Opportunities in the genomics industry

As a life sciences company EZZ is on a mission to improve quality of life and human health. The company is focusing on genomic research and product development to address four key areas affecting human health including genetic longevity, human papillomavirus (HPV), helicobacter pylori and weight management.

A recent report has found the global genomics market is expected to grow from $0.94 billion in 2020 to $1.07 billion in 2021 at a compound annual growth rate (CAGR) of 13.8, with the market expected to reach $1.78 billion in 2025 at a CAGR of 14%.

“In collaboration with leading universities to conduct research in those four areas, EZZ aim to become one of the key participants in the genomics sector in the near future,” Mark, the interim CEO and co-founder of EZZ, said.

The ASR Wealth Research team said: “We view EZZ Life Science as an interesting company forging its way through a competitive landscape.”

 

Strength in experienced team and customer relationships

ASR highlighted EZZ’s experienced management team as its strength. The company is led by a team of experienced professionals with backgrounds in skin care, consumer health and other complementary industries, and with proven track-records of success at other businesses before joining EZZ.

It is the management team’s experience, which the company will be counting on to overcome risks, deliver future opportunities for the company, and maintain market confidence.

The business also has several strong customer relationships, with EAORON and EZZ products being stocked in a wide range of national brand pharmacies, leading supermarkets, and specialist retailers, as well as online platforms.

This article was developed in collaboration with EZZ, 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.

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