Demand slump in key markets, FX to affect FY2015

Uninspiring demand scenario to impede top-line growth in FY2015

Schaffner unexpectedly announced that its largest division - EMC - has been facing headwinds as orders for its high-quality solutions from the Chinese solar inverter industry fell significantly. However, the dip could be partially offset by a healthy demand for ECOsine harmonic filters. The PM division too is facing the heat of the ongoing geo-political tensions in Europe as a key client, whose end market is Russia, trimmed down orders. On the brighter side, Schaffner stated that the AM division is performing in line with the group's expectations.

Guidance on 1H and full FY2015 results

Schaffner guided that revenue growth for 1HFY2015 will be flat y/y, given challenging market conditions and the abolition of CHF/EUR peg. Based on this guidance and the forex impacts, we expect Schaffner to report net sales of CHF102mn for 1HFY2015. The group also stated that it expects EBIT margin for the period to decline by 180bps y/y to 3%, indicating that cost base will remain high. For the entire fiscal year 2015, Schaffner at current exchange rates expects the top-line to remain stagnant (y/y) as demand from various key markets continues to remain soft. The group anticipates EBIT margin to decline from 7% last year to 5% in FY2015 on account of high CHF costs and flat revenue growth. Management stated that the group is working on executing cost management measures, which should result in reduced personnel costs in Switzerland in the mid-single digits.

CHF de-peg to impact FY2015

The group derived just over 2% of the revenues (FY2014) from Switzerland, indicating the scrapping of the CHF/EUR floor would negatively impact the group's top-line in FY2015. Further, a significant portion of the expenses are incurred in CHF specifying that a large portion of the cost base will not change. This hurts the group's EBIT margin, according to management by 1 percentage point in FY2015. However, as the CHF stabilizes to a new normal based on the market conditions, we believe the group will post a healthy revenue and earnings growth beginning FY2016.

Stock weakens post guidance

The FY2015 guidance did not augur well with investors as the stock opened with a gap-down of 7.4% (CHF 265) and continued to slide further intraday. After a sales growth of ~10% y/y over the last two years, investors had expected FY2015 to be a positive one, despite the negative impact of CHF appreciation. However, we view the selling frenzy to be an over-reaction as the group has solid fundamentals and will perform well over the medium term.

Compelling valuation vs. peers

Over the last six months, Schaffner stock has largely been range bound, after the positive sentiment post strong 1HFY2014 results subsided. The stock corrected sharply on announcement of the abolition of the CHF/EUR floor; however, it recovered largely in line with the Swiss benchmark index. The stock continues to trade at a discount, based on the closing price pre guidance update, of 5% and 12% on a P/E and EV/EBITDA basis, respectively, to its product peers. On the similar line, it trades at a discount of 5% and 17% (P/E and EV/EBITDA respectively) to its industry peers. Given Schaffner's long-term growth prospects, we believe a discount to its peers is unwarranted and that valuations remain attractive.

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