Consolidation progresses on European EMS market, Hanza acquires Orbit One
Translation: Original comment published in Finnish on 12/04/2023 at 7:20 am EET
Hanza, Incap's and Scanfil's Swedish competitor in the European EMS market, announced on Friday that it had acquired Swedish contract manufacturer Orbit One. The purchase price (approximately 7x EV/EBIT) is in line with the industry’s moderate acquisition pricing. We assess that Hanza was a natural buyer for the company, considering the location of the factories and the business profile.
We estimate that the largish acquisition was completed with neutral pricing
Swedish contract manufacturing (EMS) and supply chain solutions provider Hanza announced on Friday that it had acquired Swedish contract manufacturer Orbit One. Orbit One’s revenue for the past 12 months is SEK 1,100 million, which is about 28% of Hanza’s revenue for the last twelve months. Orbit One’s EBIT-% for the last 12 months is 6.4%, which is slightly lower than the profitability of listed contract manufacturers. However, the balance sheet of the acquisition target is light as is typical for EMS companies, which enables decent return on capital with a single-digit EBIT margin. In addition, Hanza’s management has convinced that it can improve the performance of acquisition targets through the cost and sales synergies generated in the integration. If the additional purchase price is realized, the valuation of the transaction corresponds to an EV/EBIT of 7x, so the pricing seems somewhat neutral in the industry framework (cf. 2023e adjusted EV/EBIT Scanfil 9.5x, Incap 6.5x).
A Swedish acquisition target is suitable for a Swedish buyer
The acquisition is larger relative to both the size of Hanza and the size of typical acquisitions in the industry. At Incap’s CMD in fall 20202, an external consultant estimated that the number of electronics contract manufacturers of this size class (2021 revenue 50-100 MEUR) is around 50 in Europe. There is, therefore, room for consolidation in the sector, but profitable EMS acquisition targets in this size class are likely to interest several industrial buyers. Difference in nuances, like in this case the location of the factories and expertise in electromechanics, are factors that we believe made Hanza a very natural buyer for Orbit One. We feel that Orbit One’s profile would, for example, have fit Scanfil and Incap far weaker than Hanza. We also believe that Hanza's arrangement does not substantially change the competitive landscape from Scanfil's or Incap’s perspective in Europe.
Acquisitions are also part of Scanfil’s and Incap’s playbook
Scanfil’s and Incap’s situations on the acquisition front differ, even though the balance sheet position of both companies offer possibilities for acquisitions in our opinion. Scanfil’s organic growth has been strong in recent quarters, which is why focus probably is on organic growth investments (e.g. expansion of the Siedraz plant). Scanfil’s growth has also tied up some working capital in inventories, which we believe would have to be released before major deals. Geographically, we estimate that Scanfil seeks inorganic growth especially in Asia outside China, the US and possibly in German-speaking Central Europe.
Incap’s organic growth has turned negative as customer risks materialized, and the company recently completed the Pennatronics acquisition in the US, with further integration work to be carried out. However, thanks to its strong balance sheet (incl. working capital released as revenue decreases), Incap could have the opportunity and eagerness for new acquisitions next year. We estimate that Incap’s geographical focus areas in inorganic growth are the US and continental Europe.
However, what we find positive for Scanfil and Incap is that the increased valuations of acquisitions in the EMS sector in 2021-2022 seem to have reached a reasonable level from the point of view of value creation. Considering this and the need for structural consolidation in the fragmented sector, we estimate that both companies will advance in their inorganic growth strategies in the medium term at the latest.