Berenberg initiates coverage of W7 owner Warpaint at ‘buy’

Berenberg initiated coverage of Warpaint on Thursday with a ‘buy’ rating and 550p price target as it said the company’s highly cash-generative business model and debt-free balance sheet support strong top-line growth.

Warpaint owns the W7 and Technic cosmetics brands. Berenberg noted that its products are among the most affordable in their categories and are distributed across major retail outlets with significant store estates.

"Historically, the business has experienced some challenging periods of end-market performance, linked to the struggling UK high street," it said.

"However, it now has a more diversified and strengthened approach, delivering capital appreciation and persistent end-market outperformance. We expect this to continue given an array of structural and company-specific opportunities ahead."

The bank highlighted a significant margin recovery, noting the gross margin has expanded by 800 basis points since FY 2020, which it perceives as sustainable.

"Historical margin expansion has been driven by growth in end-market volume, coupled with management's strategic decision to refine its non-branded sales focus and acquire its US sales and marketing platform.

"We forecast end-market growth to be volume-driven and supportive of further margin expansion. We project gross margin expansion of 120bp from FY 2024E to FY 2028E."