Scanfil Extensive Report: Topline-driven value creation

Translation: Original published in Finnish on 4/9/2025 at 11:15 pm EEST.

We reiterate our Accumulate recommendation for Scanfil and lower our target price to EUR 9.00 (was EUR 9.40), reflecting estimate cuts due to the trade policy situation and an increase in the required return. We expect Scanfil's playbook to remain viable, even though uncertainty related to investment-driven demand is now very high. In our view, the risk-adjusted expected return of the stock across all components is still slightly higher than the required return. 

Global electronics contract manufacturer

Scanfil offers its customers the opportunity to outsource the manufacture of products containing electronics and focus on their core operations, which creates flexibility in cost structures and improves capital efficiency for customers. Scanfil manufactures end products especially for the industrial, energy and environmental sectors (green transition), as well as for the healthcare segment. In these customer segments, small production batches, short delivery times and long product cycles, as well as a partial need to be present near customers' product development, enable smaller companies to operate viably, even though competition in the industry is tight. The company has a total of 11 factories divided into the geographical areas of Central Europe, Northern Europe, APAC and the Americas. In our opinion, Scanfil's strengths include a comprehensive factory network, global operating model, a cost-efficient culture, long experience in the industry, and the speed, flexibility and quality of production. The company also has a strong financial history, which reflects the viability of Scanfil's strategy in the long term. In our view, the clearest risks for Scanfil are the global economy, investment-driven demand and, to some extent, increased competition. Scanfil has a production plant in the US, serving the local markets, but due to indirect effects, we see the possible US tariffs and their retaliatory tariffs as negative news and a risk to the company's business. 

Scanfil is a growth company

We estimate that the volumes of Scanfil's relevant market are growing by about 3-6% per year in the long term, driven by GDP growth, increased outsourcing of industrial production, electrification and defense investments. The company's market is fragmented, which gives Scanfil a good platform for inorganic growth. In our view, acquisitions are an integral part of Scanfil's growth strategy, which has historically implemented successful M&A transactions. In our opinion, the company has ample debt capacity on its balance sheet to carry out even a large (EV > 100 MEUR) acquisition or several smaller acquisitions. Scanfil has suffered from weak demand in a sluggish economic environment in 2024. The impact of US tariffs and retaliatory tariffs on the global economy will be somewhat negative if implemented, while German infrastructure and defense investments would support activity in Scanfil's main market in Europe. However, we expect the company to remain on a moderate revenue and earnings growth path in the coming years in a slowly improving operating environment (incl. SRX acquisition in 2025). Earnings growth is revenue-driven, while profitability is expected to remain roughly stable around the lower limit of the company’s target level (7-8% EBIT%). 

The valuation picture is moderate despite the risks

Based on our estimates, Scanfil's P/E ratios for 2025 and 2026 are approximately 12x and 11x, and the EV/EBIT multiples are 9x and 8x. The valuation lags slightly below the company's 5-year medians and is at a discount relative to the peer group, which provides some buffer against estimate risks. We expect slight earnings growth, limited upside in valuation, and a dividend yield of approximately 3% to form an expected return that is slightly higher than the required return over the next year and the medium term. The DCF value is also still above the share price. Therefore, we reiterate our positive view on Scanfil, which has an attractive long-term investment case, despite the increased risk profile due to external factors.