Report on Schaffner Holding AG by Research Dynamics: FY2017 results update


Strong 1H numbers with 14.5% organic growth, but turn-around in Power Magnetics weighting on group result

EBIT above expectations, supported by market share gains in EMC division

Schaffner reported a healthy set of numbers for the period with EBIT of CHF 9.0mn (+50% y/y), included a one-off positive impact from insurance payments for the fire at the Automotive plant in Thailand and restructuring provision pertaining to the Power Magnetics (PM) division. Adjusted EBIT came in at CHF 7.5mn (margin: 6.9%), largely driven by higher volumes, partially offset by still negative margins in the PM division and overhead costs pertaining to expanding the management team (new CEO, new management at PM). Net income was at CHF 4.0mn (CHF 4.2mn in 1H17), despite one-time adjustments arising out of the US Tax Cuts and Jobs Act. Adjusted net income stood at CHF 5.7mn. Management reiterated its target of organic sales growth of 5% and an EBIT margin of > 8% for the medium term. We believe the sales target could be overachieved this year on the back of a healthy order book of CHF114.4mn (74% of total order intake belongs to high margin EMC and Automotive segments), which ensures steady revenue stream for the company in the upcoming period.

Broad-based growth across segments lifts top-line

Schaffner reported organic net sales of CHF 108.3mn (+14.5% y/y, +10.2% in local currency) for 1H18 driven by broad-based growth across segments and regions. Revenue growth was particularly positively impacted by the drive systems, rail technology and power supplies, while automotive electronics and machinery & robotics maintained prior year high levels. Three of the company's core markets i.e. automotive electronics (24%), drive systems (23%) and power supplies (14%) accounted for ~60% of the company's total sales. Europe remained the key market for Schaffner with a contribution of 44.9% of total revenues, followed by Asia (35.9%) and North America (19.2%). The company's order intake surged 14.8% y/y to CHF 114.4mn which provides revenue visibility for the upcoming period. EBIT grew significantly to CHF 9.0mn (1H17: CHF 6.0mn) with an EBIT margin at 8.3% (+190bps y/y). The company's net income stood at CHF 4.0mn (1H17: CHF 4.2mn). Under the period under review, the EMC division expanded its market leader position thanks to project wins against competition, while the AM division maintained its strong market position despite a minor setback in the form of the fire at the Thailand plant. In 1H18, Schaffner introduced additional measures in the PM division to speed-up the turnaround.
 

Estimate adjustments:

On the back of the good set of numbers, we adjusted our estimates for improved operating conditions in the company's core markets. Accordingly, we increased revenue growth to 5.1% for the FY19-22E period (4.6% previously), primarily driven by the EMC division. On EBITDA, we now expect CHF 22.0mn for FY17-18, increasing to CHF 28.7mn in FY22E, as compared to our previous estimate of CHF 27.9mn in FY22E.

Valuation attractive based on discount to peers

Based on 2018 median EV/EBITDA estimates, the company is trading at a 9% discount to product peers while simultaneously trading at a discount of 38% to its industry peers. Based on 3-year average EV/EBITDA, the company trades at a discount of 7% to product peers and 5% discount to industry peers. The intrinsic price of the group using the DCF methodology (WACC: 7%, terminal growth rate: 1%) comes to CHF 364, which corresponds to an 12% upside to the current share price. We believe the company's improved profitability, strong order pipeline, strengthening of the management team and recent good operating performance should help Schaffner to achieve its medium and long term target (organic sales growth of 5% and EBIT margin of more than 8%). Furthermore, a targeted dividend payout of 40-50% of the net profit bodes well for long-term investors.