Scanfil: Boost from acquisition diluted by market conditions

Translation: Original published in Finnish on 10/7/2024 at 8:47 am EEST.

We reiterate our Accumulate recommendation and EUR 9.00 target price for Scanfil. We have included the SRX acquisition announced last week in our forecasts, but the forecast changes were diluted by market-related reasons. At the group level, the near-term changes to the estimates were relatively minor. Scanfil is still very moderately priced in our view (2025e P/E 11x). We believe the stock offers a good expected return at current valuation levels, especially for medium-term investors, despite the clear near-term market risks. 

On paper, we think SRX is a good fit for Scanfil

Scanfil announced on Thursday that it has acquired SRX, an electronics manufacturing company in Australia and Malaysia, for a debt-free purchase price of 23 MEUR (plus a conditional additional purchase price of 10.6 MEUR). Given the seemingly good fit of Scanfil and SRX on paper and the seemingly neutral starting valuation of the deal, we are moderately positive on the acquisition. However, we estimate that the value creation of the transaction will depend heavily on Scanfil's ability to grow SRX organically and to transfer existing key customers to SRX's factories and, in turn, to transfer SRX's large customers to Scanfil's factories. We commented on the transaction in more detail on Friday here.

We added SRX to our estimates and revised the rest of our forecasts slightly downwards

The acquisition of SRX had no impact on Scanfil's current year guidance of 780-840 MEUR revenue and 54-61 MEUR adjusted EBIT. We have included SRX in our forecasts, which had a 4-5% positive impact on our revenue and EBIT estimates for Scanfil in the coming years. The impact on EPS forecasts was slightly lower due to slightly elevated financial cost forecasts. In addition to the inclusion of SRX, we slightly lowered our projections for the rest of the year and the coming years, as investment-driven demand, which is important for Scanfil, still seems to have evolved sluggishly during Q3 in the face of weak macro and industry data from the European and Chinese economies. There are still no signs of a rapid pick-up in demand, although the fall in market interest rates should stimulate demand with some delay. In addition, Scanfil's competitors Note and Kitron issued negative profit warnings in September for demand-related reasons and we do not believe that Scanfil's market situation is significantly different from its competitors, although there are differences in the companies' customer structures. Thus, the upward pressure from the SRX acquisition was mitigated by the market situation and the changes in revenue and earnings forecasts for the next few years remained within 0-3%. This year, we expect Scanfil's revenue and earnings to decline in the weak economic environment and to end the year at the lower end of the current guidance range. As such, we do not believe that achieving the guidance can be considered certain, although the contribution from SRX in Q4 will help reach the guidance. In the coming years, we expect the company to return to gradual growth and earnings improvement as the economic situation recovers and also as falling interest rates begin to stimulate investment-driven demand.

Valuation level still very moderate

Scanfil's 2024 P/E ratio is 11x and the corresponding EV/EBIT ratio is 9x, based on slightly declining earnings this year. The multiples are below the company's moderate 5-year medians and the levels we have assumed for the company and are at a discount to the peer group. Therefore, with Scanfil's earnings growth starting in Q4, the valuation upside and a dividend yield of just over 3%, we believe the expected return on the stock is still well above the required return. The share’s DCF value that is slightly above our target price also indicates that the share is cheap. Still, given the slightly negative news flow risks for the rest of the year, we are not taking a stronger positive stance on the stock for now.