Orthex Q2'25: Erratic growth

Translation: Original published in Finnish on 08/22/2025 at 7:30 am EEST

Source: Inderes & Bloomberg (consensus)

Orthex’s Q2 report was reassuring regarding European growth after a weak start to the year, but sales in the Nordics developed surprisingly sluggishly. Despite the revenue decline, the company improved its profitability, which we consider a good performance on paper. The overall picture of our estimates is largely unchanged, so we reiterate our target price of EUR 5.5 and Accumulate recommendation.

Rest of Europe was a relief, but the Nordics disappointed

Orthex’s Q2 revenue decreased by 2% to 20,5 MEUR, which was fully in line with our expectations. However, the sales structure clearly deviated from our expectations, as sales in export markets grew against our expectations and the company struggled with weak demand in the Nordics. The company highlighted cautious purchasing behavior from a few Nordic customers, but no distribution or shelf space was lost, which is reassuring. Sales in the rest of Europe grew strongly due to improved distribution, successful new product launches, and effective in-store campaigns. The strong growth in the rest of Europe was surprising after a weak start to the year, as sales to customers with increased credit risks were restricted, as in Q1. The comparable EBIT settled at 1.7 MEUR, which clearly exceeded our 1.4 MEUR estimate and the level of the comparison period. We consider the earnings improvement a strong performance given the contracted revenue. The earnings improvement was due to a stronger gross margin, which received slight support from raw material prices According to management, however, actions related to production planning and efficiency were more important.

This year is in danger of being a gap year in terms of growth

Orthex's revenue decreased by 3.5% in H1, depressed by intermittent performance in the Nordics and the rest of Europe. For the Nordic countries, the factors that plagued development appear to be temporary, but after the sharp Q2 decline, we believe the company must demonstrate that market shares are not being lost in the Nordics. European development showed the growth strategy to be effective in export markets despite limited deliveries from some customers. For Orthex’s growth story, increased credit risks among customers are a frustrating situation, as they overshadow the positive developments in export markets. We recognize a possibility of clear acceleration in export market growth if credit risks decrease among these customers, but our forecasts do not yet rely on this. This year, we expect the company's revenue to contract by 1%, but next year, we anticipate growth to accelerate to 5%, driven by European export markets.  Despite the subdued H1 development, we still believe Orthex is well-positioned to achieve its revenue growth target of over 5%, but the EBITA margin target of over 18% seems to be a long way off with the current growth efforts. Thus, the normalized EBIT margin for Orthex in our forecasts is 11-12%. The company has an ongoing strategy process, in connection with which we find it possible that the financial targets will be updated to be more growth-driven. We feel a stronger pursuit of growth than at present would be justified for the investment story, as we see Orthex's growth as value-creating.

The valuation level is moderate, but future growth determines the expected return

Orthex's earnings-based valuation (2025e: EV/EBIT 11x, P/E: 14x) seems neutral to us and turns attractive with our forecasts for next year. Driven by a 5-6% dividend yield in the coming years and earnings growth, we see potential for the share to generate an annual return of 12-16% as revenue returns to a growth path. With our 2025-2026 EBIT forecasts, Orthex is priced at a 16-18% discount to its peers, which we believe provides a margin of safety against the forecast risk related to near-term growth. Our DCF model indicates a per-share value of EUR 6.4, which supports looking beyond the short-term challenges of the stock.