Translation: Original comment published in Finnish on 2/20/2024 at 6:45 am EET.

Scanfil will publish its Q4 report on Friday at around 8:00 EET. We expect Scanfil to have maintained its earnings growth in Q4, but the pace is probably already clearly slowing down. However, in line with the consensus, we expect Scanfil to increase its dividend slightly to EUR 0.23 per share and thus continue as a European dividend aristocrat. This year's guidance is the most interesting and also the most uncertain part of the report. In our view, Scanfil's guidance for the current year points to slightly lower revenue and earnings, as the demand picture is softening due to weak European macroeconomic conditions and rising interest rates, at least for H1, and last year's comparison figures are also set at a high level.

We expect moderate comparable growth from Scanfil

We did not have a recent consensus forecast available for Scanfil. We estimate that Scanfil's demand in Q4 remained strong across almost all customer groups, in line with the technology industry's average healthy order book. However, growth is already clearly slowing in the light of calmer order flows from Scanfil's customer base and inventory reduction measures. We estimate Scanfil's revenue to have fallen by 2% to 218 MEUR in Q4. On a comparable basis, however, we expect a further 5% growth, as reported revenue is likely to be burdened by a significant decrease in spot purchases to secure supply (Q4'22 spot purchases 15 MEUR vs. Q4'23e: 0 MEUR). In terms of customer segments, we expect Cleantech&Energy's revenue to grow strongly and Connectivity's to grow slightly. We estimate that reported growth in the other three segments was negative in Q4.

Performance should improve markedly from a modest comparison level

We expect Scanfil's Q4 adjusted EBIT to land at 15 MEUR, an improvement of around 10% year-on-year. We estimate that Scanfil’s profitability improved clearly year-on-year and was 6.9% (adj. EBIT-%). We estimate that profitability was supported by higher revenue, the end of zero-margin spot purchases and a slight improvement in productivity. On the lower lines, our financial expense and tax forecasts are in line with Scanfil's normalized levels, although non-cash FX differences that are not material to the company as a whole could impact financial expense and EPS. We forecast Scanfil's EPS to land at EUR 0.17. In terms of cash flow, we expect a good report from the company as seasonally Scanfil typically releases working capital in Q4. In addition, the decline in revenue and the stabilization of supply chains should already allow the company to reduce its high inventory levels.

We expect the company to guide for slightly weaker figures than the record year 2023

This year, we expect Scanfil's revenue to decline by 5% to 852 MEUR and adjusted EBIT to decline by 6% to 59 MEUR. Therefore, in order to meet our expectations and probably also the market's expectations, we estimate that Scanfil should reach a revenue of 800-900 MEUR and an adjusted EBIT of 54-64 MEUR. Scanfil faces very strong comparison figures, especially in H1, while recent news flow in the technology industry suggests that order growth has at least stalled. The European macroeconomic outlook is weak and high interest rates are also dampening investment-driven demand. As a result, we estimate that it will be very difficult to achieve earnings growth this year from the record level of 2023. This would be in line with some of the Nordic contract manufacturers who have already given their outlook.

Updated strategy may be ready for release with Q4 results

Scanfil has been in the process of updating its strategy under the leadership of the new CEO, who took office in the fall. Scanfil will organize a Capital Markets Day in early March. Therefore, we believe it is possible that Scanfil will announce its strategy in conjunction with the results. We do not believe that Scanfil will significantly change its growth strategy based on a global operating model and the role of factories. However, Scanfil has achieved its profitability target of 7%. Many of the company's peers are both aiming for and have achieved a higher level of profitability than this. Therefore, we believe it is possible that Scanfil will raise its profitability target to, for example, 8% as part of the strategy update. In our view, this would be positive news for the stock, although, of course, the company needs a credible plan to get there in addition to the target.