Essity (essityb.ST): Margin cliff approaches, consensus looks too high; Sell

Research evidence excerpt

Essity (essityb.ST): Margin cliff approaches, consensus looks too high; Sell

Goldman Sachs Essity (ESSITYb.ST)

How do we reach a sub-12% Q3 EBITA margin?

How do we reach a sub-12% EBITA margin in Q3? Following our downgrade of Essity

to Sell, investors have asked us how we arrive at our 11.1% Q3 EBITA margin forecast,

versus company-compiled consensus of 12.8%. This report outlines the key assumptions

behind our forecast, spanning input-cost inflation and pricing. We see relatively limited

near-term downside risk to our cost estimates, given the lagged P&L effect of

commodity spot-price moves. We see stronger price realisation or faster savings delivery

as the main upside risks. We are closely monitoring Nielsen-implied pricing and

European PPI, both of which remained deflationary in June.

We forecast high-single-digit unit-cost inflation in Q3, driven by accelerating

oil-derivative and pulp costs and persistent distribution and energy headwinds. We

assume pricing rises +0.5%, led by Consumer Tissue, but remains well below cost

inflation, with Q4 25 price reductions not yet reflected in the comparison base. We

therefore expect a sharp gross-margin contraction, only partly offset by relatively

slower SG&A growth, resulting in an 11.1% EBITA margin and reported EBITA 13% below

consensus. While consensus also expects Q3 to mark the margin trough, we believe it

materially underestimates the earnings reset. Our FY26/27 EBITA forecasts are 3%

below the street despite an assumed improvement in FY27.

Exhibit 1: Our detailed EBITA bridge implies 13% downside to near-term consensus expectations

EBITA bridge between Q3 25 and Q3 26, GSe

We forecast high-single-digit

unit-cost inflation in Q3

5,056

-13% earnings

We expect over 2% organic downside

sales growth 4,622