Madara Cosmetics: Bet on entreprenaurship

Madara is fast growing premium organic cosmetics brand from Latvia. It started from garage in 2005 and is now the leader in organic cosmetics in Finland and Latvia. It has strong distribution position in the main cosmetic outlets and e-commerce sites in the two home-markets. It has started to expand to new markets, mainly France, Germany and UK with excellent results.

Organic cosmetic market is growing 7 % p.a. in Europe on back of consumer preference change to more sustainable and natural products. Madara is growing faster than the market; it has clocked 26 % p.a. revenue growth since 2016 and 46 % in H1-2020, with help of strong e-commerce capabilities.

Best part of the growth is that it’s profitable ant the balance sheet is pristine with solid net cash position. Madara has been very profitable throughout history (18 % EBIT in H1) and the multiples are very reasonable 12xEBIT2020E and 16x TTM EBIT.

Madara has in-house R&D lab, marketing team and production capacity, which are necessity in the fast moving novelty driven cosmetics market. Madara is constantly coming with new products and it already has more than 80+ products; all categories from anti-age, facial, makeup, body to haircare are growing.

I attribute the success of building the strong brand, constant product innovation and A+ marketing to the skilled young founder lead management team that (wo)mans the key R&D, marketing and general management positions.

Lotte Tisenkofa-Iltenere started the company, with her husband and two marketing/art specialists, without background in cosmetics, after having been cooking her own organic cosmetic formulas and writing about them in forums in 2005 (when she was 22). She is also mother of three.

The founder team owns 62 % of the shares so they are highly incentivized to create value. I’m not afraid of DD-risk since reputable and one of the largest cosmetics wholesalers in Finland, Transmeri, owns 24 % shares.

With this shareholder structure and 40 MEUR market cap, it’s not surprising that there’s hardly any liquidity, and the stock price acts quite weirdly occasionally.

In my mind this investment is bet that the management team can continue do the impossible and grow in the cut-throat cosmetics industry. Recent growth trends are amazing, but retailers are quick to ditch them from shelves if the stuff stops moving. Thus, the importance of innovation, intelligent marketing and constant growth.

If the growth continues at this pace, the stock should trade on 20xEBIT on growing earnings base i.e. 100 % upside is realistic, but this comes with significant growth, execution and small company risks. There’s also M&A option if the brand start really fly in the bigger Germany, UK and France markets and big-beauty gets interested.

But instead of doing full writeup on the stock, I will try something new and share my thinking through “investment deck”:

PDF version

Disclosure: Long Madara Cosmetics with 4,5 % position