Scanfil Q3'24: Outlook contained both good and bad

Translation: Original published in Finnish on 10/28/2024 at 8:30 am EET.

In our view, the overall picture of Scanfil's Q3 report published last Friday was slightly negative and we lowered our forecasts slightly for the near term. Thus, we revise our target price for Scanfil to EUR 8.70 (was EUR 9.00) and reiterate our Accumulate recommendation. In our view, the stock is moderately valued (2024e: P/E 13x, EV/EBIT 10x). As a result, the company's attractive long-term investment story can now be accessed at what we believe is a comfortable near-term expected return at current price levels. However, due to the risk of earnings warning associated with the end of the year, the further purchases right now would require at least a medium horizon for the investor. 

Revenue decline worse than expected, impacting earnings despite good profitability

In Q3, Scanfil's revenue decreased by 20% to 173 MEUR from a good comparison level, which was significantly below our forecast. Revenue declined and missed our forecasts in all segments. Scanfil’s adjusted EBIT fell from the strong comparison period by around 20% to 12.4 MEUR, which was below our forecast by roughly 10% for revenue-related reasons. The company's cost structure was very resilient due to savings and other productivity improvements, as profitability (Q3: EBIT % 7.2%) was at the level of the strong comparison period, despite the sharp decline in revenue. We commented on Scanfil’s Q3 numbers in more detail on Friday here. 

Guidance was reiterated, but achieving it seems challenging

Scanfil reiterated its guidance for 2024 of 780-840 MEUR revenue and 54-61 MEUR adjusted EBIT. We expected this before the report, but the Q3 miss leaves the bar for Q4 very high and, even to reach the lower end of the guidance range, Q4 should be by far the best quarter of the year. The company was expecting a strong Q4 due to a pick-up in demand (including probably some new projects won in H1 coming into production and slowing/completion of destocking), but we think the risk of a second profit warning this year is still present. The company reported that it had won new projects in Q3 at a seemingly nice pace, but the lack of comparison data makes it still difficult to assess the magnitude of the successes. Following the report, we lowered our near-term revenue and earnings forecasts for Scanfil by 1-4% in light of the recent weakness in the European economy. This year, we expect Scanfil's revenue and earnings to decline in a weak economic environment and to end the year slightly below current guidance. In the coming years, we expect the company to return to growth as the economic situation recovers and also as falling interest rates begin to stimulate Scanfil's investment-driven demand. In addition, the SRX acquisition brings inorganic growth starting in the fourth quarter. The main uncertainties relate to the market, as Q3 once again showed that Scanfil's own house is in order. However, the company needs higher volumes for profit growth because, in principle, growth in the contract manufacturing sector will generate earnings mass.   

Valuation remains moderate from all perspectives, although risk is elevated at the short end

Based on our estimates for 2024 and 2025, Scanfil's adjusted P/E ratios are 13x and 11x, while the corresponding EV/EBIT ratios are 10x and 9x. This year's multiples are in line with the company's moderate 5-year medians, and next year's multiples are below them. In relative terms, Scanfil is atypically and unjustifiably discounted. As such, we believe the valuation of the stock is still attractive. As a result, we believe that the expected return from an imminent earnings turnaround, modest valuation upside and an expected dividend yield of just over 3% is still above the required return. The DCF also indicates that the stock is cheaply priced. Given the short-term negative news flow risk (i.e. profit warning), continuing to buy now requires the investor to take a medium-term horizon.