This doesn’t happen very often, but I love being wrong in this way.

Nine months ago, I wrote, “A supplement company won’t command a PE of 25.” Well, it seems the markets have proven me wrong once again.

I’ll update my valuation because, at the time of writing, the Pinehills contract wasn’t on the table, and FDA approval for the U.S. hadn’t been mentioned yet.

The company is now perceived to be six times as valuable, but what has really changed since I first wrote about it? Not that much, really. They’re executing well and have since been discovered by the market.

The thesis is still on track for me, and I’m comfortable continuing to hold as I see growth levers from the following:

- USA: FDA Approval – They’ve started selling via TikTok and plan to leverage partners from mid-2025. While this won’t ‘materially’ impact 2025 results, it could drive solid growth into 2026 and beyond.

- China & Pinehills: The $15M per year Pinehills contract should add a substantial boost to their core market in China. I also expect ‘organic’ growth (driven by plenty of paid marketing) to continue.

- New Products: They plan to launch 14 new products at the start of the year, and we should know more about their impact by the first-half results.

At this point, I don’t expect earnings to grow by 90% year-over-year again, but I believe 20%-25%+ earnings growth is possible. If so, FY25 earnings might land in the $8.5M to $9.5M range.

Applying a PE of 25 (yes, I’ve changed my mind) for a high-growth company suggests a valuation of $210M, with a share price target of $4.75.

For a company with a revenue run-rate of $42M (H1 revenue was ~$21M), signing an agreement for $15M per year with guaranteed 10% annual growth is significant.

There's a concern that such large deals might reduce margins due to competitive bidding. However, EZZ's gross margins are healthy at 70% (according to their half-year presentation). 

While I think this agreement will lower margins somewhat, it should still contribute positively to the bottom line. Last year's NPAT margins were 10%. If we assume an 8% margin for FY25 and some organic growth, adding the $15M of this agreement, we could see revenue around $60M. With an 8% margin, that results in about $5M in NPAT.

At the current share price of $1.06 (up about 75% since I first posted my thesis on the company), and with $14M in cash, EZZ has an EV of $34M. This implies an EV/NPAT ratio of 6.8.

It still seems undervalued to me, so I'm happy to hold.

Wrote about them and 3 others in my latest for a rich life. Link here: https://arichlife.com.au/4-strong-fy24-q3-quarterly-cashflow-reports/

EZZ Life Science Holdings Ltd (ASX: EZZ) 

EZZ is a manufacturer of premium health supplements. They own two brands: EZZ and EAORON, distributed across the APAC region and China.

Looking at the prices of some of their supplements online tends to evoke a sense of unease in me. It’s challenging to imagine how expensive non-medical pills and creams can significantly enhance one’s health and wellbeing. However, it’s probably fair to acknowledge that I am not their primary target customer.

EZZ delivered a strong quarter, with cash receipts up 111% on PCP and operational free cash flow totaling $1.85 million (I calculate free cash flow the same way I describe above for BAS). This inflow brought the company’s cash reserves to $14.47 million.

Looking at the company’s quarterly cashflow reports, a positive narrative seems to be unfolding. We can see good growth combined with the nascent stages of a transition toward sustainable free cash flow.

Now, management did call out that this was somewhat of a lucky quarter, explicitly mentioning that “a substantial portion of the cash inflow arises from delayed payments.” Therefore, it would be imprudent to extrapolate this quarter’s results as indicative of normal ongoing operations.

Looking at the valuation more closely, with $14 million in cash reserves and a market capitalisation of approximately $40 million (based on 44.41 million shares outstanding at $0.88 per share), EZZ currently trades at an Enterprise Value (EV) of $26 million. Over the last 12 months, the company generated cash flow of approximately $3.5 million, resulting in an EV/Free Cash Flow (FCF) ratio of approximately 7.5. This valuation appears reasonable (potentially even cheap) considering the company’s decent growth in the last 2 years. 

One obvious risk associated with EZZ to me lies in its reliance on product marketing efforts. Marketing expenses are currently accounting for a significant portion of revenue (58% in the most recent quarter). This high marketing expenditure suggests to me that organic demand for their products is not yet established, and it would need to be for long-term growth to be sustained. Over time, I would monitor this metric and would like to see it slowly decrease from quarter to quarter. 

Additionally, being a manufacturer entails the inherent risk of requiring substantial capital investment at irregular intervals to sustain production.

Despite these risks, the improving metrics and potential for continued growth means this is a stock worth watching.

While the company achieved an impressive top-line growth of 41%, the regression in profits tempered my enthusiasm, rendering the results somewhat average from my perspective.

The decline in profitability can be attributed to increased investments in product development and launches, with a particularly notable rise in marketing expenses. The escalating customer acquisition costs could pose a long-term challenge if not managed effectively.

The broader picture for me remains the company's current enterprise value of $8.4M against a forward earnings projection of $2.2M. This seems a little too cheap.

This valuation discrepancy provides a compelling reason to maintain holdings until the full-year results are published, at which point a more informed reassessment can be made.

With all the above in mind, here’s why I still find them interesting. 

1. Growth. Whilst the update we received in Q1 wasn’t over the top on the growth front at 12% on PCP, that’s on the back of a monster FY23 result with revenue growth of 147.3% year on year. 
2. We also got an update that during this year’s Double 11 Global Shopping Festival (an important selling moment for them) held in November sales increased by 25% increase from the AUD2.56m achieved last year. So growth appears to be continuing. 
3. Undemanding Valuation. Let’s do the quick math here. 
4. Market Cap. At today’s share price of 0.64, with 42.71M shares on issue, that’s a MC of $27M. 
5. Cash. FY23 saw a positive operating cash flow of $4m resulting in a cash position of $13.8m at year-end.
6. Profit. FY23 full year profit of $3.6M 
7. FCF. FY23 full year free cash flow of $3.4M 
8. Enterprise Value. $27M - $14M = EV of $13M. 
9. Multiples.
10. PE of 7.5
11. EV / Profit of 3.6
12. EV / FCF of 3.8
13. Profitable. 

Conclusion: It’s a Cheapie with a Chance. If the profitable growth can continue, there’s a chance this one is undervalued. A supplement company won’t command a PE of 25, but I think we can forecast fair value with a EV / Profit of 10. This would result is share price of $1.77

Let’s start with the problems on this one, there are a few. 

1. Premium Pricing Risk. Who sells a bottle of supplements for $800? Isn’t that a bit much? One man’s margin is another man’s opportunity, how long can they keep this up? 
2. Marketing dependant. The last quarterly shows marketing spend of $3.5M on customer receipts of $6.7M. Level one thinking may get you think that if only they spent less than 52% of revenue of marketing, margins could look even better. But I think that’s simply not possible; revenue is marketing dependant given the company doesn’t yet have a recognisable brand and product, and spent on marketing will likely remain elevated in the near term. Marketing is a good game because is more tech dependent than people dependent than sales, but there’s always the risk that Google increase the tax and margins start to look less appealing. 
3. The leadership situation. I tend to dislike it when the chairman’s the one leading all investor communications. Given they’ve now confirmed Mark Qin as the CEO after nearly 4 years in the COO position, it would be refreshing to see him taking the lead in conversations with investors. We want to hear from the person actually running the show, not just the one on the board with a partial view of internal operations.