Translation: Original published in Finnish on 5/8/2026 at 8:42 am EEST.

Orthex's profitability in Q1 exceeded our expectations, but the prolonged conflict in the Middle East has weakened the company's outlook. Based on normalized earnings, Orthex's valuation appears neutral. For now, however, we prefer other companies in the sector until we see signs that cost inflation risks are easing or that the company is achieving sustainable growth in its important Nordic markets. We reiterate our Reduce recommendation and reduce our target price to EUR 4.4 (was EUR 5.0) driven by estimate revisions.

Q1 figures were stronger than we expected

Orthex’s Q1 revenue increased by 2.7% to 21.6 MEUR, which was in line with our estimate. However, this growth was driven by changes in exchange rates. Key export markets for the growth story experienced impressive growth, while the Nordic countries, plagued by weak consumer confidence, saw sluggish development. The increase in plastic raw material prices was not yet reflected in Orthex's Q1 margins, and EBIT strengthened to 2.1 MEUR, exceeding our estimate of 1.8 MEUR. At the end of the quarter, the company's balance sheet was strong (net debt/EBITDA 1.0x, with a target of below 2.5x), which creates financial flexibility for growth investments and M&A. However, the earnings day did not provide insight into larger capital allocation decisions.

Cost pressures ahead

Inflationary pressures resulting from the conflict in the Middle East strongly influence the short-term outlook for Orthex, which uses oil-based raw materials, leading to reduced predictability. The 2022 inflation wave caused Orthex's EBIT margin to halve. It is worth noting that, compared to that shock, European spot prices for plastic raw materials are still about 20% below their 2022 peak levels. Orthex aims to price its products with a long-term view, even amid this shock, though the company has reacted more quickly with price increases than it did during the previous wave of inflation, in our view.

In connection with the report, we have slightly lowered our growth forecasts, particularly for the Nordic countries, due to lackluster performance in Q1 and a challenging demand outlook. Due to cost inflation pressures, we have also lowered our gross margin forecasts slightly. As a result, our EBIT estimates for the coming years decreased by 4–8%. In our estimates, the company's EBIT will decline this year and return to growth next year as cost inflation eases. Our estimates account for the recent development in oil prices, but we do not model potential multiplicative effects, such as a weakening economic outlook or raw material availability challenges. Due to these uncertainties, we believe the risks to the estimates are weighted to the downside in the short term. In our view, Orthex is among the better-positioned companies in its industry with regard to inflation risk.

Share price drivers are scarce until cost inflation eases

Orthex's earnings-based valuation (2027e P/E 11x, EV/EBIT 9x) is neutral/favorable, in our opinion, and the dividend yield alone enables an expected return of around 6%, according to our estimates. Our estimate for the company's cost of equity is around 9%, so the current share price also reflects expectations for earnings growth. However, with the ongoing conflict in the Middle East, it is difficult to identify other short-term share price drivers for the stock, and the risk of prolonged cost inflation and raw material availability challenges grows daily. Our DCF model indicates upside for the share and a value of EUR 5.8 per share. Realizing that potential, however, requires a recovery in profitability and steady earnings growth in the longer term. Nevertheless, confidence in earnings growth has been tested in recent years as the company's EBIT remains at 2021 levels.