Scanfil Q3'24 flash comment: The company alone cannot compensate for the accumulating pressure of volumes

Translation: Original published in Finnish on 10/25/2024 at 9:05 am EEST.

Scanfil released its Q3 report this morning, which was weaker than expected in terms of EBIT, as the slump in revenue continued to be worse than we had anticipated.  Scanfil repeated its guidance. Given the Q3 underperformance, the bar for Q4 is already very high, even though the company expected Q4 to be the strongest quarter of the year. We expect Scanfil's share price reaction to be slightly more negative than the general market today due to the Q3 earnings miss and the risk of a profit warning for the rest of the year, even though the share would be cheap even with a slightly weaker result than we forecast for the current year (2024e: EV/EBIT 9x- 10x).

Top line stagnation continued to be worse than expected

In Q3, Scanfil's revenue decreased by 19% to 173 MEUR from a good comparison level. The decline was similar to Q2 and worse than expected (the comparison figures for Q3 were already slightly easier than Q2). The revenue drop was due to weak demand and customer destocking in the current year. Revenue fell in all segments and was below our forecasts. In Industrial, the deviation from our forecasts was small, but Energy&Cleantech and especially Medtech&Life Science were disappointing in terms of top-line development. Of course, the SRX acquisition in early October had no impact on Q3 revenue.  

The margin was good, but revenue determines the earnings mass

In Q3, Scanfil's adjusted EBIT decreased by around 18% to 12.4 MEUR. The result fell short of our forecast by just under 10% for purely revenue-related reasons. Profitability (EBIT%) was at a good level for Scanfil’s scale and flat year-on-year at 7.2%, which we believe is a good performance given the magnitude of the revenue decline. Scanfil has been able to support its profitability well through savings and other productivity improvements, which bodes well for the improved demand environment that will come in due course. However, in the current demand environment, organic growth is not sufficient to offset the strong pressure on earnings from the decline in revenue.

On the bottom line, the company recorded marginal adjustments for Q3 and financing expenses were broadly in line with our expectations. The tax rate was higher than expected due to what we believe is a one-time adjustment related to back taxes. Scanfil's Q3 EPS fell with the operating profit and missed our forecast. From a cash flow perspective, the report was very strong as working capital was significantly freed up due to the decline in revenue and the seasonality of cash flow.

Guidance was reiterated, but the risk of profit warnings for the rest of the year is obvious

Scanfil reiterated its guidance, according to which the company's revenue in 2024 will be 780-840 MEUR and adjusted EBIT 54-61 MEUR. This was in line with our expectations, although we had already estimated before the report that the sustainability of the guidance would be under pressure by the end of the year. The Q3 miss has further highlighted this risk, and we believe the performance warning risk for the rest of the year is evident. Scanfil commented that the recovery in demand has been slower than expected, but still expects Q4 to be the strongest quarter. The reasons for the latter statement were still unclear to us after a quick scroll through the report, but they could of course be related to some new sales wins both in H1 and still in Q3. From a longer-term perspective, we believe the report supported some signs of improved performance at Scanfil (including strong profitability), but translating this into meaningful organic earnings growth will require traction from a pick-up in investment-driven demand. We believe that external factors - the European economy, the continued decline in interest rates and improving business confidence - will play the most important role.