Difficult market environment persists

Strategy 2020 targets seems increasingly difficult to achieve

Schaffner reported a marginal loss of CHF 0.3mn in 1H2016. The result was expected after the company's profit warning earlier this year. The company's core business is facing strong headwinds from lower activity in oil, gas, mining and construction sectors, as the sharp fall in commodity prices has led to a cut in capital expenditures for most industries. Though the management has maintained its target of reaching an EBITA margin of more than 8% in the next 24 months, we believe this target is becoming increasingly difficult as external factors continue to hamper the company's performance. The company is stepping up its cost reduction program in the current difficult macro environment, with a target of realizing more than CHF6mn (up from CHF5mn earlier) in saving annually. The total cost of the efficiency program now under way amounts to approx. CHF4mn of which CHF0.7mn were charged to the first half results. Most of the savings are expected to be effective from FY2017, and fully effective from FY2018 onwards. However, with slowing economic growth in China, and the commodity process not expected to recover sharply in the near future, we believe it will be difficult for the company to achieve this target.

Revenues in-line, EBIT margins ahead of guidance

Schaffner reported net sales of CHF92.6mn (-9.7% y/y, -9.2% in local currency) for 1H2016. EBIT stood at CHF0.5mn, mostly in line with our expectations. The company earlier had warned that it was likely to post a marginal loss at the operating level in 1H2016. The management called this a transformational year, where is it undertaking structural restructuring to reduce costs. The Power Magnetics business is witnessing a cyclical slowdown. The elevators business in China is slowing, while the Robotics business in the EMC division is witnessing good growth. The Automotive division is also performing well, already meeting medium term targets.

Segmental performance

EMC: The EMC division's top line was mostly stable with revenues coming in at CHF45.4mn, down by a marginal 2.7% y/y. The segment was supported by strong sales growth in Power Quality. However, the Power Quality business also required high R&D expenditure to build the next generation of the ECOsine harmonic filters, which put pressure on the division's profitability. The segment's EBIT declined 13.6% y/y to CHF3.1mn in 1H2016. The management expects a tentative recovery in the power supplies and machine tools & robotics business.

PM: The PM segment's revenues fell 24% y/y to CHF25.2mn in 1H2016 despite strong growth witnessed in China. The weak demand for technology, photovoltaic and rail technology sectors from other regions impacted the division's top line. The division reported an operating loss of CHF 3mn owing to low capacity utilization in North America and European factories. However, the management is positive on the sector's outlook as the division's order intake has risen, suggesting the segment has bottomed out.

AM: The AM division revenues were marginally down in the first half of FY2016 at CHF22.0mn (-2.9% y/y). However, sales volumes increased, supported by continued growth in the keyless entry business. Operating profit surged 68% y/y to CHF4.7mn (68% y/y). Operating margin jumped to 21.2% in 1H2016 from 12.3% in 1H2015. The management believes it will be able to sustain these elevated profit margins for about the next 24 months.

Optimistic outlook

Schaffner management was hopeful about the outlook for the business. An improving book to bill ratio (1.02 in 1H2016 vs. 0.99in 1H2015) and improving order intake suggests sequential growth in 2H2016. Management reiterated its Strategy 2020 EBITA target of achieving more than an 8% margin.