Cost Transformation And Capacity Expansion Will Face Softer Baby Care Demand

Catalysts

About Ontex Group

Ontex Group supplies personal hygiene products across Baby Care, Adult Care and Feminine Care categories, with a strong presence in private label and retail brands.

What are the underlying business or industry changes driving this perspective?

• Although new Baby Care and Adult Care contracts in North America and Europe are expected to provide additional volume, the wider Baby Care category is experiencing soft demand and an 11% volume decline. This can cap the effect on revenue growth and limit operating leverage on earnings.
• Adult Care retail brands are seeing high single digit volume growth and capacity is being expanded in this category. However, healthcare contracts are long term and can be lumpy by quarter, which may temper the margin benefits from better fixed cost absorption and keep net margins sensitive to contract timing.
• A cost transformation program is delivering €16 million of net savings in the quarter and improving supply chain efficiency. At the same time, raw material prices for fluff and packaging remain above last year’s level, which can constrain further EBITDA margin recovery if input costs do not ease meaningfully.
• Plant upgrades such as the Belgium footprint transformation and the Buggenhout rebuild are intended to lift manufacturing efficiency. However, the remaining restructuring cash out of more than €5 million in the last quarter of the year and more than €10 million in 2026 adds pressure on free cash flow and could slow net debt reduction and interest coverage improvement.
• New capacity in higher growth product formats like baby pants and Adult Care products is coming on stream. At the same time, overall private label demand in Europe and North America is contracting and A brands are active with promotions, which can limit pricing power and weigh on revenue mix quality and EBITDA margins.

Assumptions

This narrative explores a more pessimistic perspective on Ontex Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Ontex Group's revenue will grow by 2.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.4% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach €100.4 million (and earnings per share of €1.39) by about January 2029, up from €7.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €117.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.2x on those 2029 earnings, down from 52.6x today. This future PE is lower than the current PE for the GB Personal Products industry at 52.6x.
• The bearish analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.33%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• New Baby Care and Adult Care contracts in North America and Europe are already lifting volumes in a soft market. Management expects these wins to contribute through 2026 and 2027, which could support higher revenue and operating leverage than implied by a flat share price view, with a direct effect on revenue and earnings.
• The ongoing cost transformation program is delivering €16 million of net savings in a single quarter. This is supported by footprint upgrades in Belgium and Buggenhout and SG&A streamlining. If sustained, this could structurally lift EBITDA margin above current levels and improve net margins and free cash flow.
• Capacity is being added in higher growth formats such as baby pants and Adult Care products. Adult Care retail brands are already growing at a high single-digit rate, so a continued shift toward these categories could improve the product mix and support stronger revenue growth and EBITDA margins over time.
• Free cash flow turned positive in the quarter and net debt fell to €543 million with leverage at 2.7x. Management is targeting a leverage ratio of about 2.5x by year end, and continued balance sheet improvement could reduce interest costs and support higher equity valuations through better earnings and cash generation.
• Management reports that customer destocking, supply chain disruptions and the Segovia plant outage are now resolved. Raw material prices have stabilized and supply chain efficiencies are improving, so if these operational improvements persist, they could sustain EBITDA margins around the recent 11.4% level or higher and support stronger earnings than a flat share price would imply.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Ontex Group is €5.0, which represents up to two standard deviations below the consensus price target of €6.22. This valuation is based on what can be assumed as the expectations of Ontex Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €7.4, and the most bearish reporting a price target of just €5.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €2.0 billion, earnings will come to €100.4 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of €4.99, the analyst price target of €5.0 is 0.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.