Orthex Q4'24: Better than feared

Translation: Original published in Finnish on 3/13/2025 at 8:25 am EET.

Orthex's Q4 report was stronger than expected, helped by Nordic sales. However, longer-term value creation is heavily dependent on export market growth, which has recently stalled due to challenges with distribution partners. In our view, the stock's valuation picture appears moderate, but an attractive earnings outlook requires a sustainable turnaround in earnings growth. We reiterate our Accumulate recommendation and our EUR 6.0 target price. 

Nordics strong, export markets soft

Orthex’s Q4 revenue grew by 2% to 23.8 MEUR, which exceeded our 22.8 MEUR estimate. Sales in the Nordic countries remained at the strong level of the comparison period, while export markets grew by 6%. Growth in the export market suffered from increased credit risks for some distributors, which forced the company to restrict its shipments to them. We understand the external drag on growth, but with the longer-term growth story heavily dependent on export markets, accelerating growth in these markets is key. The comparable operating result settled at 2.7 MEUR, which is well above our estimate of 2.2 MEUR. The estimate beat was driven by stronger-than-expected revenue and lower marketing costs. The board's dividend proposal of EUR 0.22 was one cent below our expectations. With its strong balance sheet, Orthex could well afford to pay a more generous dividend, but given the company's growth potential in Europe and the required future investments in production capacity, we believe that strengthening the balance sheet is a justified solution.

Forecast changes remained small, success in European growth markets determines the long game

Our forecasts are largely unchanged since the Q4 report. For Orthex's longer-term sustainable growth and target of over 5% annual growth, a renewed focus on sales in the European growth markets is essential. In Q4, revenue growth in export markets was constrained by a reduction in shipments to some customers with increased credit risk at the end of Q4, so the full impact of the reduction in shipments will not be felt until 2025. We expect this to limit growth in the current year, despite the company's own growth efforts.  In the Nordic region, Orthex continues to show a surprising ability to grow despite challenging market conditions, but the conditions for growth from a strong local market position are increasingly skewed outside the Nordic region. As the demand environment recovers, we believe Orthex is well positioned to achieve its revenue growth target of over 5%, but the EBITA margin target of over 18% seems to us to be a long way off with the current growth efforts. Thus, the normalized EBIT margin for Orthex in our forecasts is around 12-13%. Therefore, we believe it is possible that Orthex could update its financial targets to be more growth-driven. However, the natural time to update targets may only be after an M&A transaction or a factory investment that allows for new production capacity.

Valuation level is moderate

Orthex's earnings-based valuation (2025e: EV/EBIT 11x, P/E: 14x) is neutral and turns to attractive with our forecasts for next year. Driven by earnings growth, we see potential for the share to generate an annual return of around 15% with a dividend yield of 4-5% in the coming years. Our 2025-2026 EBIT forecasts put Orthex at a 15-18% discount to peers, which we believe provides a margin of safety against the near-term forecast risk from challenges with partners. Our DCF model suggests a value of EUR 6.8 per share, which also indicates an attractive expected return.