Orthex Q2'24: A carefree ride

This report is a summary translation of the report “Huoletonta menoa” published on 8/23/2024 at 8:00 am EEST.

Orthex's Q2 numbers were slightly below our expectations, although the performance was decent in a weak business environment. Based on Nordic retail sales figures, we estimate that the company continued to gain market share in both the Nordic and other European markets, but growth in the rest of Europe remained sluggish compared to the growth target of more than 10%. Our projections for the next few years turn the stock's valuation picture on the attractive side. We revise our target price to EUR 7.0 (was EUR 7.2) and reiterate our Accumulate recommendation. 

Slower growth and slightly lower gross margin than we expected led to revenue shortfall

Orthex’s Q1 revenue grew by 4% to 21 MEUR, which was still below our forecast of 21.5 MEUR. Sales increased both in the Nordic countries (+5%) and in the markets of the rest of Europe (+6%), despite weak consumer good sales figures. However, growth in both markets fell short of our expectations. According to the company, growth in the rest of Europe was limited by the postponement of some deliveries from Q2 to Q3, underlining the difference with our forecasts. We would like to see the company accelerate its growth outside the Nordic region, where the growth story is increasingly focused and where a strong market share does not limit the scope for growth as it does in the Nordic region. The adjusted EBITA of 1.6 MEUR missed our estimate of 1.8 MEUR. Orthex's fixed cost structure was well in line with our expectations, so the lower-than-expected profitability is explained by a gross margin below our forecasts. On an overall level, we believe that the business developed positively given the known weak demand environment.

Forecasts for the coming years slightly down, growth market engine should be fired up

In connection with the report, we have slightly lowered our revenue forecasts for the coming years, especially for the rest of Europe, which is driving our forecast changes. Our revenue and profit forecasts fell by 3-4%, but the overall picture of our expectations for the next few years remains unchanged. Growth in the rest of Europe was disappointing, but based on management comments, deliveries in this market were postponed to the next quarter. This, combined with increased growth investments (e.g., the new Benelux sales office) should allow growth in Rest of Europe to accelerate already in Q3. We expect Orthex's revenue to grow by approximately 7% over the next few years, driven by the rest of Europe, in line with our revenue growth target of over 5%. Orthex's existing production facilities are capable of supporting our projected growth over the next several years without significant capital investment, making growth in the current size class particularly profitable. We expect the company's EBITA margin to increase to 14-15% in the coming years, which is still below the company's EBITA target of 18%. Orthex's strong balance sheet provides the company with the flexibility to pursue M&A should attractive targets become available.

Valuation supports sticking with the share

Orthex's earnings-based valuation (2024e: EV/EBIT 12x, P/E: 16x) is slightly elevated in our view, but driven by a 4-5% dividend yield and around 15% annualized earnings growth over the next few years, we see the stock primed for an annualized return of 12-16%. Our EBIT forecasts for 2024-2025 price Orthex at a discount of about 14-15% to peers. In our view, the discount appears to be on the wide side, but we estimate that further evidence of accelerating growth is needed to narrow the gap. Our DCF model suggests a value of EUR 7.3 per share, which also supports a positive view.