This report is published by Research Dynamics, an independent research boutique


Interim management to guide through challenging times

CEO Alexander Hagemann leaving with immediate effect
On Friday, 15 July 2016, Schaffner announced the leaving of the long-term CEO of the Group, Alexander Hagemann, with immediate effect. He is said to pursue new challenges outside of the company. Ad interim, the Group's CFO Kurt Ledermann, who has been with the company for more than 8 years, will take over as CEO. Thus, the Group Executive Committee will consist of Kurt Ledermann, CEO ad interim, Ah Bee Goh, Chief Operating Officer, and Guido Schlegelmilch, Head of the EMC - Schaffner's largest - division. Kurt Ledermann seems predestined to take on the ad interim CEO role, since in addition to his finance and accounting background he also holds a degree in Electrical Engineering from the Swiss Federal Institute of Technology ETH. To manage the additional function, he will be supported by his long-term deputy CFO, Christian Herren. No news regarding the search of a successor was provided, but we believe that given that the Power Magnetics division has been at an interregnum stage for some time (and "ad interim" managed by Alexander Hagemann), a joint personnel decision might be envisaged.

Resignation not a total surprise
Strategically, the Group has moved into the right direction during the 9-year tenure of CEO Hagemann - purposefully building up the PM division by internal and external growth, expanding into Asian and North American markets to reduce the dependency on Europe and thus driving internalization of the Group, focusing on lean manufacturing, etc. However, operationally the Group had been facing unexpected challenges for various (external) reasons such as unfavourable FX developments, postponed or cancelled projects, wage inflation, etc. over the past years, hence missing to achieve its own guidance more than once and disappointing with the results. Thus, while being crucial in the strategic development of the Group, the bottom-line results that management under Alexander Hagemann presented were lacklustre in the last 5 years, except for FY2014. We could well imagine that some investors were not satisfied with this performance.

"Strategy 2020" maintained, but short-term focus on internal projects
Just recently, on occasion of its Investors' Day on 8 June 2016, Schaffner management maintained the targets set out under the Vision 2020, with the Group's EBITA margin to reach more than 8% within the next 24 months and organic revenue growth above 5%. However, the revenue target originally set at CHF 400 million looks increasingly challenging to reach, given that in the short-term management focus is on internal projects, not external growth.

In the interim, we believe that the daily operations would not be too affected by the leaving of the long-term CEO as also under the Executive Management Committee now in place, the priority should remain on cutting costs, firstly by consolidating production facilities and cutting overheads. Secondly, the Group is transferring more of production (mostly from Shanghai) to its Thailand factory, which is the lowest cost production facility for the company, while at the same time continuing with one factory each in the US, Europe, China and Thailand in order to have customer proximity. With these ongoing initiatives, Schaffner aims to reduce production and overhead costs by CHF 6 million annually.

The above short-term measures, together with the "ad interim" situation, make the acquisition part of the Strategy 2020 over the next 12 months more unlikely, unless an opportunity would present itself unexpectedly. While it may also take as long as a year to solve the CEO succession, we believe that with successful execution on the cost cutting side investors might be increasingly interested in the stock again that seems to have bottomed out following last year's disappointing results.

Valuation
The company continues on its restructuring path, and this change looks to be a part of the overall process. The transitory phase and the one-off restructuring expenses have significantly impacted 2016's profitability. Thus, we value the company based on its 2017E earnings. Looking on a PE basis, the stock is trading mostly in line with its 3-year historical average. Compared to peers, Schaffner is trading at a premium to its product as well as industry peers 2017 PE median. However, the company is trading at a sharp discount to its industry peers median 2017 EV/EBITDA (though at a slight premium to product peers). We believe Schaffner will come out stronger and much more leaner post the restructuring phase and this discount to industry peers on EV/EBITDA is unwarranted.