Strategy Execution Yields Solid Results

Cost optimization and enhanced utilization to bolster margins

Schaffner's initiative of establishing lean manufacturing methodology has helped it improve productivity across its operations. The Group's endeavor of a continual improvement in the processes has enabled it to eliminate inefficiencies and reduce storage time. The various initiatives towards lean manufacturing across all plants, coupled with increased flexibility to utilize EMC's capacity (operating at about 80% capacity utilization) increasingly also for the AM division has enabled Schaffner to accommodate higher demand. These factors have helped Schaffner to further improve its operating margin by 217bps y/y to 7% in FY2014. Based on Schaffner's ongoing efforts on achieving operational excellence, we expect the Group to continue to expand operating margins by about 200 bps to 9% in FY2015.

Robust demand for automotive products to boost top-line growth

Thanks to the rising demand for feature-rich, suave and technology-enabled cars globally, the Group has been able to generate strong organic revenue growth in its Automotive division over the past few years (28.4% CAGR over FY2011-FY2014). The Group is a global leader in a rapidly expanding keyless entry antenna market. Further, the rise of the electric vehicle (EV) market offers Schaffner an exciting growth opportunity. The Group has developed advanced EMC filters, which are used for interference-free operations of the new-generation electric cars. Schaffner expects the keyless entry systems and electric vehicles market growth to surpass the growth of the overall automotive industry offering it excellent revenue growth prospects. According to the company, the addressable market opportunity per Plugged-In-Hybrid-Vehicle (PHEV) for Schaffner's products is as much as EUR100 (about CHF120), thus putting the addressable market opportunity at CHF330mn by 2018 even with conservative estimates.

Healthy FY2014 results; outlook positive

Sales grew by 10.1% y/y (12.1% in local currencies and 7.3% organically) for the second consecutive year to reach CHF215mn, with the top-line trending upward across all divisions. At the same time, gross margin improved by over 220bps y/y to 29.2%, suggesting the cost rationalization efforts are yielding results. FY2014 results point towards improved operating performance despite varied economic climates across its target markets. We expect management's two-pronged approach of focus on growth verticals and emphasis on cost optimization to continue to yield positive results in the form of improved margins in FY2015.

Multiples at discount; attractive entry point

Currently Schaffner is trading at a discount of around 18% and 15% on EV/EBITDA and EV/EBIT multiples based on 2015E respectively, and 27% on P/E basis to its product peers. Similarly, the Group is trading at a discount of 31%, 24% and 42% on EV/EBITDA, EV/EBIT and P/E basis to its industry peers. We believe the significant discount is unwarranted given the anticipated robust growth in sales driven by the high-growth Power Magnetics and Automotive divisions, and - thanks to significant operating leverage - expanding margins.