Scanfil Q2'24: No miracles needed for the price level

This report is a summary translation of the report “Hintataso ei ihmeitä edellytä” published on 8/7/2024 at 8:14 am EEST.

In our view, the overall picture of Scanfil's Q2 report published yesterday was neutral and we did not make any forecast changes for the coming years beyond a marginal negative refinement following the report. Thus, we reiterate our target price of EUR 9.00 and our Accumulate recommendation for Scanfil. We consider the stock to be moderately valued from all angles (2024e: P/E 11x, EV/EBIT 9x). As a result, we believe that the company's interesting long-term investment story can be accessed with a very comfortable near-term risk-adjusted expected return at the current price level. 

Revenue slumped even more than expected, but profitability made up for it

In Q2, Scanfil's revenue decreased by 20% from a high comparison level to 196 MEUR, below all consensus forecasts. Revenue declined in all segments from strong comparison figures, driven by cooling demand and customer destocking. Scanfil's EBIT decreased by more than 20% to 13.9 MEUR from a very strong comparison period, in line with our forecast and only marginally below consensus expectations. The company's cost structure was very resilient due to savings and other productivity improvements, as profitability (Q2: EBIT % 7.1%) was practically at the level of the strong comparison period, despite the sharp decline in revenue. From a cash flow perspective, the report was strong, as expected, as the silver lining to the revenue decline was a working capital outflow from inventory and receivables to cash. We commented on Scanfil’s Q2 figures yesterday in more detail here. 

Guidance reiterated as expected, only marginal negative revisions to our forecasts

Scanfil reiterated its guidance for the current year, which had been lowered in the June profit warning to
780-840 MEUR revenue and 54-61 MEUR adjusted EBIT. This was fully expected. In addition, the company reported that it had won new projects in H1 at a seemingly nice pace, but the lack of comparison data makes it difficult to assess the magnitude of the successes. Regarding the market situation, the company said volatility and low customer predictability would continue, but expects a “gradual” pick-up of the market, starting in the MedTech & Life Science segment. Following the report, we slightly lowered our near-term revenue and earnings forecasts for Scanfil in light of the recent lackluster economic and industry data and conflicting Q2 reports from the technology industry. This year, we expect Scanfil's revenue and earnings to decline in the weak economic environment and to end the year in the lower half of the current guidance range. In the coming years, we expect the company to return to growth as the economic situation recovers and also as falling interest rates begin to stimulate Scanfil's investment-driven demand. This year's sales successes could also support growth, especially next year. The main uncertainties relate to the top line, as Q2 once again showed that Scanfil's own house is in order. In our view, the company should be able to consistently deliver margins at the lower end of the target range (EBIT-% 7-8%), as long as volumes at the factories are at reasonable levels.  

Valuation level quite moderate on all fronts

Based on our estimates for 2024 and 2025, Scanfil's adjusted P/E ratios are 11x and 10x, while the corresponding EV/EBIT ratios are 9x and 8x. This year's multiples are already below the company's moderate 5-year medians and the levels we accept for the company, and discounted relative to the peer group. As a result, we find the valuation of the share quite attractive. Therefore, with Scanfil's earnings trend turnaround starting in Q4, the upside in the valuation and a dividend yield of just over 3%, we believe the expected return on the stock is well above the required return. The DCF also indicates that the stock is cheaply priced.