New Private Label Contracts And Efficiency Gains Will Drive Long-Term Upside Potential

Catalysts

About Ontex Group

Ontex Group designs, manufactures and supplies disposable personal hygiene products for baby, feminine and adult care markets worldwide.

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

• Ramp up of newly won multi year private label and healthcare contracts in Europe and North America is set to add higher, more visible volumes on a largely fixed cost base. This supports revenue growth and operating leverage that should lift EBITDA and earnings.
• Structural mix shift toward Adult Care and baby pants, where demand is more resilient and pricing is more rational, should gradually increase average selling prices and improve group net margins.
• Completion of the Belgian footprint upgrade, including the Buggenhout plant transformation, is expected to unlock further manufacturing efficiency and automation benefits. This should reduce unit costs and support EBITDA margin expansion.
• Ongoing cost transformation across purchasing, supply chain, SG&A and innovation, combined with stabilizing raw material prices, should sustain net savings that protect margins and underpin stronger free cash flow conversion.
• Strategic emphasis on retailer brands and private label partnerships in developed markets, along with innovation and sustainability differentiation, positions Ontex to capture share from branded competitors and drive more predictable top line growth and higher returns on invested capital.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ontex Group's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 5.9% in 3 years time.
• Analysts expect earnings to reach €114.6 million (and earnings per share of €1.18) by about December 2028, up from €7.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, down from 50.4x today. This future PE is lower than the current PE for the GB Personal Products industry at 50.4x.
• 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 10.61%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged softness in consumer demand for private label hygiene products in Europe and North America, combined with continued A brand promotional intensity, could keep volumes structurally below prior years and cap the anticipated revenue growth from new contract wins. This would ultimately limit EBITDA expansion and earnings growth.
• Overcapacity in European baby care, particularly as baby diaper volumes fall and the category shifts toward baby pants and larger sizes, may trigger more aggressive price competition in tenders and renewals. This could pressure average selling prices and compress net margins despite internal cost savings.
• Reliance on ongoing cost transformation, footprint optimization and raw material price stabilization to offset inflation in salaries, logistics and other services may prove optimistic if input costs reaccelerate or efficiency gains plateau. In that case, EBITDA margins would likely erode and free cash flow generation could weaken.
• Execution and ramp up risk around new multi year contracts and major plant upgrades such as Buggenhout, including potential supply chain disruptions or slower than planned volume onboarding, could recreate earlier operational issues. This may depress revenue realization, delay margin benefits and weigh on earnings.
• Persistently high leverage near 2.5 times to 2.7 times and recurring restructuring cash outs tied to the Belgian footprint transformation limit financial flexibility. Any shortfall in free cash flow or EBITDA could therefore constrain strategic investment and increase refinancing risk, putting pressure on net income and equity valuation.

Valuation

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

• The analysts have a consensus price target of €6.92 for Ontex Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.9 billion, earnings will come to €114.6 million, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of €4.78, the analyst price target of €6.92 is 31.0% 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.