4MASS S.A. (4MASS.WA)

Polish insider-owned nano cap producer of hybrid nail polish, skin & face care and professional cosmetic products with 2 moats, selling for less than 60% of value, p/e of 10.1 and EV/EBIT of 4.8.

1. Key Facts

Description: 4MASS is a Polish producer of hybrid and classic nail polish, light-cured nail polish products, and skin and face care and hair growth products. It also produces hygienic and protective disinfectants, medical/surgical masks and alike. Depending on the type and brand of the product, it sells through different channels like individual customers online, and, most importantly, to professional spas, cosmetic and beauty salons. It pursues an aggressive, but profitable, growth strategy and international expansion. It’s also building moats based on vertical integration and patents and is 30.6% owned by the insiders. It was incorporated in 2017 and is headquartered in Wołomin, Poland (suburbs of Warsaw).

Track record: Over the last 7 years 4MASS compounded revenue at a 95.4% CAGR (58.9% over the last 5 and 61.5% last year). It has also grown its BVPS at a 3-year 15.7% CAGR (33.9% last year). Its ROIC improved drastically from the 5-year average of 10.9% to a 3-year of 17% (last year was 30.8%). A lot of its growth came from expanding its capacity (new factories and plants) and effective strategy focused on developing moats and international expansion. 

Market cap: Its market cap as of the 2nd of November 2023 is ~139 million PLN (~$33.8 million). It has grown 183% since January 1, 2023. It is also ~229% up from its 52-week low.

Valuation: 4MASS.WA trades at a TTM P/E of 10.11x (4-year average of 17.60x), EV/EBIT of 4.77x (3-year average of 15.11x) and at a ~62% discount to a conservatively calculated intrinsic value.

2. Business Overview

Background 

4MASS is a producer and distributor of cosmetic products in the manicure and pedicure categories. It operates in the Polish cosmetic segment and sells to both retail customers and other companies (BTC and BTB). The main product in the company’s range is a hybrid nail polish. However, it also makes pedicure and manicure accessories like UV/LED gels, nail art products like glitter and dust, various types of liquids and care products, manicure accessories for styling, nail polish curing lamps, and protective medical equipment (from 2020). 

The company’s portfolio is divided into 4 main brands: Claresa, its flagship hybrid nail polish; Stylistic (available at both Claresa and Palu websites), nail files, nail cutters, milling machines, LED lamps, and sterilisation products; Palu, professional cosmetics and products for use in beauty salons. In 2020, it also added a fourth brand to its portfolio, Virsept, hygiene, disinfection, and protective products.

4mass sells through 3 distinctive sales channels. The first channel is the mass market 3rd party retail stores like supermarkets and discount chains (e.g. Biedronka, Dino, Rossmann, etc.) That's where it sells its hybrid and normal nail polish, cosmetic accessories, and care masks for the face, hands, and feet. The second channel is professional cosmetic and beauty salons that purchase 4mass’s Palu and Stylistic Salon System and imported products. The third and smallest out of the 4 channels are the private labels. All the customers in this channel are domestic and the company has a 2 million monthly capacity. The most notable of the customers in this channel are Biedronka and LPP.

Pre 2020, it used to also sell through a loyalty programme based on recommendation and MLM (Multi-Level-Marketing) system where customers like cosmetic salons recommend and sell 4mass products and promotional items. A common strategy in the beauty industry. It closed this channel in 2020.

As of FY 2022, the total revenue is split as such: 43% Cosmetic and beauty salons, Spas, and nail polish shops (Palu, Stylistic, and Virsept), 34% Private labels (Biedronka, LPP, etc), 16% Export, 5% E-commerce (individual customers, mostly Claresa), and 2% others. The B2B channel has good economics and should remain the company’s focus and the export channel should expand as the percentage of the total revenue as it’s a part of the management’s strategy discussed later in this deep dive.

Claresa is a brand sold mostly to individual customers through brick-and-mortar stores and the company’s online website. The product range includes hybrid nail varnishes for women of all ages without a specific age group in mind. The brand has a palette of 300 different colours and the company tries to offer “quality at affordable prices”. The low price without sacrificing too much on quality is possible through its low cost and high volume profile powered by cost advantages discussed later. Claresa’s nail varnish usually sells at around 16-17 PLN per tube whilst the equivalents at Rossmann sell for 20-25 PLN and 18-75 PLN at Douglas (more premium brand discussed later). 4MASS can underprice them on average without sacrificing product quality.

Whilst hybrid nail varnish is Calera’s flagship product, other products sold under the brand include makeup bases, eyeshadow products, eyeliners, lipsticks, eyebrow pencils, UV/LED gels, varnish removers and cleaners, conditioners, creams, brushes, powders, etc.

(Claresa hybrid nail varnish)

As opposed to Claresa, Palu mainly addresses beauty and cosmetic salons, but also spas and manicure/pedicure professionals. It also has an independent distribution model based on its own sales and distribution teams. The range is fairly comparable to Claresa’s. Still, it addresses a different customer base so the products are slightly different as they are sold to professionals via B2B as opposed to consumers like Claresa. 

Palu products are in a higher price range than Claresa due to the different customer bases and as such the margins are usually higher than Claresa’s. The competition is also much more limited and fragmented for Palu. Despite that, 4MASS underprices its competition in that channel as well. A typical price for a Palu nail varnish ranges from 18 to 32 PLN whilst competitors like salonproffesional.pl equivalent products sell for 100-122 PLN each and at Neonail for 37 PLN +. Palu has allowed the company to improve its Claresa margins (not much higher cost for equivalent products) whilst meaningfully under-pricing the competition.

(Palu starter kit products)

Stylistic Salon System is a range of products like LED lamps for curing hybrid and gel products (light-cured products), sterilisation and other equipment for professional pedicures and manicures, or files, buffers, clippers, etc. Just like Palu, Stylistic products are addressed to and cater to professional beauty/cosmetic salons and spas. If you live in Poland, there is a high chance that your local cosmetologist orders his/her products from Stylistic or Palu.

The last and the newest brand in the 4MASS’s portfolio is Virsept, which was a direct response to Covid as the product line induces things like medical and one-time masks and disinfection products, which were in massive demand during the pandemic. However, these products are used and ordered by cosmetic salons (4MASS’s key customers) regularly. As such the company is developing Virsept products beyond the pandemic. The protective products the company offers under Virsept include antibacterial hand disinfectants, antibacterial and antifungal surface cleaners, and triple-layer medical masks. Even though the demand for these is not as high as 2 years ago, they blend in nicely with 4MASS’s customer base and other brands and are a relatively small part of total sales. 

Customers

The company’s customers are divided into three main groups. First, there are individual customers who purchase from a wide range of Claresa products (nail and makeup) either online on 4MASS’s website or through various brick-and-mortar stores. Second and the most important customer group is made out of earlier mentioned beauty and cosmetic salons, pedicure and manicure professionals, and spas in Poland and (increasingly so) internationally in Europe. These purchase Palu and Stylistic products, which often include not just nail polish or make-up products but also professional supportive equipment like LED lamps used by every single professional beauty salon in Poland. 

The third (and the second largest) group of customers are companies ordering 4MASS’s private labels. The margins and pricing power are much lower in this part as the company often lacks bargaining power with the likes of Biedronka or LPP, however, as we will discuss later the company’s moat does not necessarily stem from its brand, but from two other factors, which allow it to become a preferential private label manufacturer for many bigger companies and obtain an expanding scale of operations.

There is not much reason to expand on the company’s history as it’s a very young company with little to no important “lore”, but its growth strategy is crucial to understand to wrap your head around 4MASS, its moats and its future. 

Growth Strategy