Orthex Q3'24: Price drop opens up the game

Translation: Original published in Finnish on 11/18/2024 at 8:00 am EET

Orthex's growth was at a good level in Q3, but the result fell short of expectations as the company had proportioned its cost structure for stronger growth. In our opinion, the overall picture of the story remains unchanged, although with the report we expect growth in the next few years will require a heavier cost structure. With the negative earnings forecast changes, we lower our target price to EUR 6.5 (was EUR 7.0). However, we feel the share price has taken too much of a hit and we upgrade our recommendation to Buy (was Accumulate).

Growth accelerated outside the Nordic countries, but the result disappointed

Orthex’s Q3 revenue grew by 4% to 22.8 MEUR which exceeded our 22.1 MEUR estimate. Invoiced sales grew slightly in the Nordic countries (+1%), but in other markets, they grew by as much as 24%. The subdued sales development in the Nordics was to be expected, considering the weak demand for consumer goods, and we are not concerned about it. In other markets, growth was particularly strong, although we estimate that some orders have been transferred from the weak Q2 to Q3. The 12% sales increase in Europe this year is, in our view, a good achievement, as it came from winning market shares. Orthex’s gross margin weakened from the comparison period in Q3, which, together with higher-than-expected sales and marketing investments resulted in a weaker earnings level than forecasted. The  2.8 MEUR EBIT was a clear disappointment relative to our 3.5 MEUR forecast and the comparison period. There were several smaller factors behind the weakened profitability, but without the pull of the raw material market, we see revenue growth as the key factor in turning the result around.

We lowered our earnings forecasts, but the earnings growth outlook for the coming years still seems good

In connection with the report, we raised our revenue forecasts for the coming years by 1%, but cut our EBIT forecasts by some 10%. We welcome the acceleration of growth outside the Nordic countries, but based on the profitability disappointment, we cut our expectations for the relative profitability of growth in the coming years Orthex’s relative profitability is sensitive to the price development of plastic raw materials (particularly volatile in recent years) , which makes it difficult to assess profitability development from a structural and cyclical perspective. We see room for the company to strengthen its gross margin slightly from the current year's soft level, which, together with revenue growth, serves as the primary driver for the 14% annual EBIT growth in our near-term forecasts. Despite Q3’s soft profitability, we remain confident about the company’s competitiveness. However, it is crucial for earnings growth in the coming years that the price of Orthex's plastic raw materials does not increase from the current level with geopolitical tensions.

We feel the expected return has turned attractive

Orthex's earnings-based valuation (2024e: EV/EBIT 12x, P/E: 17x) is neutral/slightly elevated, but turns to clearly attractive with our forecasts for next year. Driven by earnings growth, we see potential for the share to generate an annual return of 15-20% with a dividend yield of 4-5% in the coming years. With our 2024-2025 EBIT forecasts, Orthex is priced at a discount of some 14-20% to peers, which we consider a wide discount. Our DCF model suggests a value of EUR 7.1 per share, which also indicates an attractive expected return.