Orthex: Growth hampered by sputtering partners

Translation: Original published in Finnish on 2/26/2025 at 7:30 am EET.

We lower our target price to EUR 6.0 (was EUR 6.5) and revise our recommendation to Accumulate (previously Buy). In the context of the report, we have lowered Orthex's growth forecasts for the next few years due to the continued weakness in the demand environment and the challenges faced by distributors of Orthex's products. We remain confident in the longer-term outlook of the investment story and do not consider the earnings-based valuation (EV/EBIT 2025e: 10x) challenging given the quality of Orthex. However, the share price drivers seem to be taking longer to materialize than we had previously expected. 

Revenue has recovered to its peak levels

Despite the sluggish demand environment, Orthex's revenue has recovered over the past year to the strong record levels of 2021. The combination of advance demand caused by the COVID pandemic and the weakened purchasing power of Nordic consumers has limited the company's growth, which has been below its target level of over 5% in recent years. We do not expect Orthex's business environment to provide substantial traction in the short term. Based on the news flow, Orthex was hit by more than usual setbacks in its export markets in Q4, including the bankruptcy of Homebase in the UK and the debt restructuring of Container Store in the US and GiFi in France. Orthex's distributor base is large and diversified and we do not expect the news to significantly disrupt the company's business, but we do expect the weakness in the distributor network to weigh on Orthex's growth figures.

Growth forecasts for the coming years reduced

In connection with the report, we have lowered our growth forecasts for the coming years by around 4%, taking into account the weak economic outlook and the challenges identified in Orthex's distributor base. These three distributors represent a limited portion of Orthex's revenue, but their challenges are likely to be more broadly reflected in the housewares category, which is central to Orthex. We believe that Container Store is the sizeable customer outside of Europe that Orthex mentioned some time ago, so the development of this customer will quickly be reflected in Orthex's sales in this market (1% of invoiced sales). Strategically, Orthex is focused on Europe, but the challenges of Homebase and GiFi are expected to negate some of the company's recent growth efforts.

In turn, our EBIT estimates for the next few years have been reduced by 9-13%, driven by operating leverage. Despite the sluggish economic environment in Europe, plastic raw material prices have remained relatively high and have not proven to be a significant driver of earnings growth, at least so far. Our forecasts do not assume a significant boost from plastic raw material price developments. However, we consider a scenario in which there is peace in Ukraine and sanctions on Russian oil are lifted as a driver, which could nevertheless push down plastic prices in Europe.

Valuation still supports sticking with the share

Orthex's earnings-based valuation (2025e: EV/EBIT 10x, P/E: 13x) is relatively neutral in our view, and Orthex will therefore need to show clear earnings growth to achieve an attractive expected return. The stock continues to trade at a 9-20% discount to peers on an EBIT basis, but we see some room for narrowing despite Orthex's smaller size. Our DCF model also points to upside from current levels and a value of EUR 7.0 per share, but we believe the weak demand environment will slow the realization of this value.