Expansion In China And Korea Will Strengthen Presence In Asia's Beauty Market

Key Takeaways

• Leveraging growth in China and Korea, Intercos aims to boost future revenues through market penetration and operational efficiencies.
  
• Diversifying services and entering new product segments are strategic moves toward margin expansion and enhanced earnings in high-margin categories.
  
• Cyberattack impact, low-margin sales, and regional vulnerabilities affect profitability, while geopolitical tensions and skincare contraction threaten growth and revenue stability.

Catalysts

Intercos S.p.A., together with its subsidiaries, creates, produces, and markets cosmetics and skin care products worldwide.

• Intercos is expected to leverage strong performance in Asia, with significant growth in China and Korea, to drive future revenue increases, as both countries have shown exceptional growth rates.
  
• The company's strategic focus on entering new product segments and maintaining a robust innovation pipeline can lead to margin expansion, particularly in high-margin categories like Makeup.
  
• Intercos's plan for industrial expansion in China and Korea aims to increase production capacity, which could support long-term revenue growth through greater market penetration and operational efficiencies.
  
• The diversification of services, especially with a shift towards full services including packaging, aims to enhance net margins by providing comprehensive solutions to clients, thus allowing for potential upselling.
  
• The anticipated global outsourcing trend in the beauty sector, coupled with Intercos's strategic positioning and global footprint, could result in an increased market reach and enhanced earnings over time.

Intercos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Intercos's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 6.9% in 3 years time.
• Analysts expect earnings to reach €89.0 million (and earnings per share of €0.92) by about April 2028, up from €48.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.8x on those 2028 earnings, up from 23.6x today. This future PE is greater than the current PE for the IT Personal Products industry at 23.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.22%, as per the Simply Wall St company report.

Intercos Future Earnings Per Share Growth

Risks

• The financial impact of the February 2024 cyberattack was significant, affecting the first quarter's EBITDA by minus 30% and resulting in overall operational inefficiencies that might continue to impact earnings.
  
• The variability in EBITDA margins, particularly due to the increased share of lower-margin full-service sales, affects overall profitability, suggesting a constraint on net margins.
  
• The geopolitical tensions and trade wars add uncertainty to global markets, potentially impacting Intercos' growth in key regions like China and the U.S., posing a risk to future revenue streams.
  
• The underperformance in the Americas, with a 6% decline in annual sales, highlights regional vulnerabilities that may continue to negatively affect revenue and market positioning.
  
• The contraction in Skincare sales during Q4 2024, exacerbated by high year-ago comparables, poses a risk to achieving desired market share and maintaining steady revenue streams from this segment.

Valuation

• The analysts have a consensus price target of €17.829 for Intercos based on their expectations of its future earnings growth, profit margins and other risk factors. 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 €16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.3 billion, earnings will come to €89.0 million, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 10.2%.
• Given the current share price of €11.9, the analyst price target of €17.83 is 33.3% 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.