Translation: Original published in Finnish on 5/16/2025 at 7:30 am EEST.

Orthex's Q1 figures were disappointing, as credit risk management, fewer campaigns than in the comparison period, and the impact of Finnish strikes pushed revenue into decline and earnings well below the comparison period. In our view, the valuation level of the share is moderate, but with weak growth prospects for the current year, the share price drivers are limited for the time being. We reiterate our Accumulate recommendation but lower our target price to EUR 5.5 (was EUR 6.0)

Weakness in export markets highlighted

Orthex’s Q1 revenue declined by 5% to 21.0 MEUR, below our forecast of 22.2 MEUR. In the Nordics, the company suffered from lost sales due to the strikes in Finland, but the company's growth markets were the key sore point. Outside the Nordic countries, turnover fell by 18% as the company limited sales to some distributors due to increased credit risk and retailers shifted their promotions to lower price point products, to the detriment of Orthex, more strongly than in the previous year. Increased credit risks among customers already weighed on Orthex in Q4'24, but now the effects are only fully hitting. For an organization seeking growth, a decrease in revenue has a severe impact on profitability. There were hardly any surprises in Orthex's cost structure compared to our expectations, but the decline in revenue weighed on EBIT, which fell to 1.7 MEUR, clearly below both our forecast of 2.6 MEUR and the comparison period's 2.8 MEUR. A positive note in the report is the 4.7 MEUR cash flow from operating activities, which was supported by the release of working capital and strengthened Orthex's already strong balance sheet position.

This year in danger of being a gap year due to weak export markets

In connection with the report, we have made a significant cut to our earnings estimates for the current year and lowered our EBIT forecasts for the coming years by 6% following the Q1 earnings miss. We see potential for an accelerated recovery in Orthex's revenue if some of the struggling retailers get back on their feet and retail trade shifts to focus more on quality rather than price in its campaigns. Amid the weak economic environment, however, we do not expect a rapid recovery in demand for Orthex's products, and in our forecasts, revenue will not return to growth until Q4, when new sales have compensated for sales lost to credit risks.

In the Nordics, Orthex seems to be holding its own despite the challenging market conditions, but the prerequisites for growth based on its strong local market position are increasingly reliant on areas outside the Nordics. Thus, the company's investment story relies increasingly on achieving sustainable growth outside the Nordics, considering that Q1 brought a crack to the growth story. As the demand environment recovers, we still see Orthex as having the potential to achieve its revenue growth target of over 5%, but the EBITA margin target of over 18% seems distant to us with the current growth investments. In our forecasts, Orthex's normalized EBIT margin is therefore about 12%.

The valuation level is moderate, but achieving high expected returns requires earnings growth behind it

Orthex's earnings-based valuation (2025e: EV/EBIT 12x, P/E: 15x) seems neutral and turns to attractive with our forecasts for next year. Driven by a dividend yield of 5-6% in the coming years and earnings growth, we see the potential for an annual return of around 15% on the stock, provided that the company gets the growth engine of export markets running again. Our 2025-2026 EBIT forecasts put Orthex at a 11-19% discount to peers, which we believe provides a margin of safety against the near-term forecast risk from challenges with partners. Our DCF model indicates a per-share value of EUR 6.3, which supports looking beyond the short-term challenges of the stock.