This report is published by Research Dynamics, an independent research boutique
Guidance confirmed despite special effects
Key data guidance
Schaffner today reiterated and confirmed its guidance issued in December 2017 during its result release for FY2017. The company expects organic sales to grow by around 5% per year on average and a minimum EBIT margin of 8% in the medium term. The company confirmed that operating developments in the divisions are going according to plan and expects FY2018 revenues to be driven by growth in its core markets (drive systems, traction, machine tools and robotics) as well as across geographies, including Asia. Due to the enforcement of the "US Tax Cuts and Jobs Act" from 1st Jan 2018, the company will have to make a one-time deferred tax adjustment of CHF 2.7mn, which will be partially offset by other special effects which were not quantified. This tax adjustment below the EBIT line, although partially offset by the special effects, will result in a slightly lower net profit for 1H2018 compared to the prior year period.
Apart from the FY2018 guidance, management also stated that the effects of the fire that took place on 30 Dec 2017 at its plant in Thailand will not have any operational impact on the current business development. Management quoted "thanks to the excellent work of the local team of Schaffner Thailand, the delivery readiness towards customers could be continued at any time". Importantly, customers and thus the company's image and reputation were not negatively impacted by the incident. We believe that the costs for the loss of equipment and furnishings incurred should mostly be covered by insurance. Thus, since on the operating side the Group is progressing according to plan, we have left our revenue and EBIT estimates unchanged. On the net income line, we reduced our 2018E forecast from CHF 14.4 mn to CHF 13.2 mn to reflect - what we estimate to be - the one-off sum of the deferred tax adjustment partially compensated by the special items.
We believe the guidance is encouraging, despite increasing raw material prices and pricing pressure in some of its market segments. This supports our conviction that the management's efforts to deliver profitable growth have started to bear fruit, even if the turnaround at the Power Magnetics division is still taking time. Our optimism is further enhanced by the ongoing improvement in the economic fundamentals both in the US and Europe.
Valuation looks attractive based on discount to peers on 2018 estimates
Based on 2018 median EV/EBIT estimates, the company is trading at a 16% premium to product peers while simultaneously trading at a 8% discount to its industry peers. Based on 3-year average EV/EBITDA, the company trades at a discount of 7% to its product peers and 5% to industry peers. However, we believe the group's improved profitability, strong order pipeline, strengthening in management team and recent multi-year contract wins should help Schaffner to achieve its medium and long-term target (organic sales growth of 5% and EBIT margin of more than 8%). In addition, the turnaround in the Power Magnetics division would have a substantial impact on group sales and margins. The intrinsic price of the group using the DCF methodology (WACC: 7.0%, terminal growth rate: 1%) comes to CHF 348, which corresponds to a 12.2% upside to the current share price of CHF 310.0.