New Multi Year Contracts And Cost Transformation Will Reshape This Hygiene Supplier’s Outlook

Catalysts

About Ontex Group

Ontex Group produces personal hygiene products across Baby Care, Adult Care and Feminine Care, with a focus on private label and retail brands.

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

• New multi year contract wins in both North America and Europe, including several that started late in Q3 and are set to run through 2026 and 2027, provide a clearer volume base that can support revenue growth and a more predictable earnings profile.
• Strong momentum in Adult Care retail brands, where high single digit volume growth and added capacity in higher growth product segments can shift the mix toward categories that tend to offer more resilient demand and support margins.
• Consumer migration toward private label hygiene products, together with retailers prioritising their own brands, positions Ontex as a preferred manufacturing partner and can translate into higher contract volumes and more stable revenue over time.
• Ongoing cost transformation, including savings from innovation, purchasing, supply chain and manufacturing efficiencies, together with the upgraded Buggenhout footprint planned to be fully operational by Q2 2026, targets lower unit costs and structurally higher EBITDA margins.
• Stabilisation of raw material prices and easing supply chain inefficiencies, combined with tighter SG&A control and lower variable remuneration, create room for operating leverage, supporting net margin and free cash flow as volumes recover.

Assumptions

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

• The bullish analysts are assuming Ontex Group's revenue will grow by 2.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.4% today to 7.2% in 3 years time.
• The bullish analysts expect earnings to reach €142.7 million (and earnings per share of €1.4) by about January 2029, up from €7.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €105.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.2x on those 2029 earnings, down from 54.7x today. This future PE is lower than the current PE for the GB Personal Products industry at 54.7x.
• The bullish 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 10.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Consumer demand in private label Baby Care is currently soft, with Baby Care volumes down 11% and contract manufacturing in North America under pressure. If this weaker demand persists as a long-term trend, it could keep group revenue under strain and limit the benefit from new contract wins, putting pressure on earnings and free cash flow.
• Ontex remains highly volume sensitive, and management highlights that EBITDA is closely tied to capacity utilization. If the structural shift toward baby pants and larger sizes leaves excess diaper capacity in Europe for longer than expected, pricing pressure and lower fixed cost absorption could weigh on gross margin and EBITDA margin.
• Raw material costs for fluff and packaging are still above last year and supply chain inefficiencies, although easing, are not fully resolved. A prolonged period of elevated input costs or renewed disruptions could dilute the benefits of the cost transformation program and limit improvement in net margin and free cash flow.
• Competitive intensity from A brands and other private label suppliers, including heavy promotional activity and potential price competition in a soft market, could constrain Ontex's ability to maintain stable pricing and may force concessions in future tenders, which would pressure revenue quality and EBITDA margin even if volumes grow.
• The group carries net debt of €543 million with leverage at 2.7x, and management is targeting a reduction toward about 2.5x through EBITDA and free cash flow improvements. If earnings recovery stalls or free cash flow remains only around breakeven, deleveraging could be slower than anticipated, increasing financial risk and interest burden in the income statement.

Valuation

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

• The assumed bullish price target for Ontex Group is €7.1, which represents up to two standard deviations above the consensus price target of €6.08. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €7.1, and the most bearish reporting a price target of just €5.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €2.0 billion, earnings will come to €142.7 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of €5.19, the analyst price target of €7.1 is 26.9% higher.
  
• 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.