Tariff And Capacity Pressures Will Challenge Beauty Outsourcing While Long-Term Margins Slowly Improve

Catalysts

About Intercos

Intercos is a global contract manufacturer specializing in make up, skincare and related beauty products for leading brands.

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

• Although the company is rebuilding margins through productivity gains and a deliberate shift away from low value packaging, the structurally softer U.S. beauty volumes and tariff headwinds on Swiss skincare exports risk capping the operating leverage that could otherwise lift revenue growth and EBITDA further.
• While Asia, particularly China and India, is delivering high single digit to strong growth and benefiting from premiumisation and international brand outsourcing, an extended normalization phase after years of exceptional expansion in Korea could slow incremental share gains and dilute the contribution to group revenue and earnings acceleration.
• Although Intercos is expanding manufacturing capacity in China and Korea to capture future regional and export demand, the current flat global volumes and heightened price competition in Korea raise the risk that new capacity is underutilized, which could pressure returns on invested capital and net margins.
• While multinationals are regaining weight in the client mix and increasingly outsourcing higher margin innovation to Intercos, the consolidation and weakness of emerging brands and Hair and Body could limit diversification benefits and leave overall revenue and earnings more exposed to a handful of large prestige customers.
• Although the new regional R&D set up and think tank for disruptive innovation aim to speed response to local trends and increase the share of new products above the usual 30 percent level, execution missteps or an inability to consistently convert pipeline interest into launches could temper the expected uplift in top line growth and margin mix.

Assumptions

This narrative explores a more pessimistic perspective on Intercos 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 Intercos's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.3% today to 7.8% in 3 years time.
• The bearish analysts expect earnings to reach €94.4 million (and earnings per share of €0.99) by about December 2028, up from €47.3 million today. The analysts are largely in agreement about this estimate.
• 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 18.0x on those 2028 earnings, down from 22.2x today. This future PE is lower than the current PE for the IT Personal Products industry at 25.6x.
• The bearish analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• U.S. beauty volumes have been flattish for two years and are facing further pressure from higher retail prices and tariffs on Swiss skincare imports, which could structurally limit a 2026 rebound and slow growth in reorders from this key market, weighing on revenue and earnings.
• Asia growth is increasingly dependent on China returning to healthier levels after a period of deceleration. Any prolonged weakness following events like Double 11 or further macro softness would undermine the region’s role as the main growth engine, constraining top line expansion and EBITDA progression.
• Korea has shifted from years of exponential growth to a phase of normalization with intense price competition and rivals aggressively cutting prices to regain share. This could erode pricing power and underutilize the newly expanded manufacturing capacity, pressuring net margins and returns on invested capital.
• The strategic pivot away from low margin packaging and Hair and Body, while improving profitability, has already led to flat expected sales for 2025 and increases dependence on Make up and prestige multinationals. Any slowdown or destocking by a few large customers could magnify volatility in revenue and EBITDA.
• Despite organizational changes aimed at faster local innovation, the end of the era of extreme globalization and the rise of powerful local beauty brands, particularly in China, increase execution risk that Intercos fails to capture enough of these localized trends. This could limit future product launches and thereby constrain revenue growth and margin mix improvement.

Valuation

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

• The assumed bearish price target for Intercos is €13.0, which represents up to two standard deviations below the consensus price target of €16.43. This valuation is based on what can be assumed as the expectations of Intercos'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 €20.0, and the most bearish reporting a price target of just €13.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €94.4 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of €10.92, the analyst price target of €13.0 is 16.0% 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.