Rebalanced Client Mix And Margin Expansion Will Support Stronger Long Term Earnings Potential

Catalysts

About Intercos

Intercos develops and manufactures beauty products such as make up, skincare and hair and body items for global brands.

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

• Rebalanced client and product mix, with Make up above 60% of sales and Prestige brands and multinationals gaining share, points to a higher quality revenue base that can support healthier EBITDA margins and earnings over time.
• Consistent margin expansion, with year to date EBITDA up 12% and margin at 14.7% plus a 161 basis point improvement to 15.9% in Q3, suggests that productivity gains and lower packaging weight are feeding through to structurally better net margins.
• Manufacturing expansion in Korea and China completed in 2024, together with ongoing CapEx, increases available capacity in regions where Asia has been the key growth contributor, which can support future revenue growth and operating leverage.
• Closer R&D alignment to regional CEOs and faster response to local trends, especially in Asia and Western markets, is designed to convert strong client interest in new technologies and formulas into a higher share of new product launches and a larger contribution to future sales.
• Multinationals growing at a double digit pace and regaining 50% of total sales, along with strong performance in China, Korea, India and Brazil, positions Intercos to benefit if beauty volumes move back toward more normal levels, which would mainly lift revenue and EBITDA.

Assumptions

This narrative explores a more optimistic perspective on Intercos 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 Intercos's revenue will grow by 5.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.3% today to 6.9% in 3 years time.
• The bullish analysts expect earnings to reach €88.0 million (and earnings per share of €0.95) by about January 2029, 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 bullish analyst cohort, the company would need to trade at a PE ratio of 29.5x on those 2029 earnings, up from 24.1x today. This future PE is greater than the current PE for the IT Personal Products industry at 28.2x.
• The bullish 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 10.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Global beauty volumes have been softer than normal for an extended period, with the U.S. market described as flattish for 2 years and 2025 sales expected to be broadly stable rather than growing. If underlying category growth stays muted for longer than management expects, Intercos could see weaker reorder volumes and a ceiling on revenue and EBITDA growth.
• The deliberate reduction in packaging and full service activity is supporting margins today, but it also removes a component of sales. If mix keeps shifting away from lower margin but higher ticket pack and Hair & Body work without enough new Make up or Skincare projects to fill the gap, total revenue and operating leverage could be pressured even if EBITDA margin stays healthier.
• Asia, especially China and Korea, is described as the key growth driver. However, recent trends already show normalization after very strong prior growth and sensitivity to currency and promotional events such as Double 11. Any prolonged slowdown or weaker export momentum from Korea into the U.S. and Europe could reduce Intercos's regional growth contribution and weigh on revenue and earnings.
• The U.S. market is facing several headwinds at once, including tariffs that add a 39% duty on products coming from Switzerland and retail price per unit increases from about 1.6% to 6% over the year. If higher prices and duties keep pressuring volumes or reorder behavior at clients, Intercos's Skincare and Make up sales to the region could remain subdued and limit revenue and EBITDA growth.
• Competition in Korea is described as reacting very aggressively on price after Intercos's strong growth, and R&D has been reorganized to rely more on local teams and faster regional responses. If pricing pressure in key categories persists or if the more decentralized R&D setup fails to consistently win local trends, margin gains could stall and earnings could come under pressure over time.

Valuation

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

• The assumed bullish price target for Intercos is €20.0, which represents up to two standard deviations above the consensus price target of €16.23. 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2029, revenues will be €1.3 billion, earnings will come to €88.0 million, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of €11.84, the analyst price target of €20.0 is 40.8% 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.