Scanfil: Earnings growth gap year was sealed

We reiterate our Accumulate recommendation and EUR 9.00 target price for Scanfil. Scanfil issued a profit warning yesterday on 2024 revenue and EBIT due to demand-driven reasons. Relative to our forecasts, the warning was slight and the forecast cuts were rather minor. The valuation of the stock was not sky-high before the profit warning, so we find the stock’s valuation image moderate as a whole even with this year’s figures (2024e: P/E 12x, EV/EBIT 8x). Considering the valuation, the prospect of earnings growth returning in the near future and the good 3% dividend yield, we still find the stock’s expected return sufficient, even though another profit warning in less than a year causes at least a temporary blow to the investment story. 

Profit warning disappointed, although it was slight in terms of the result compared to our forecasts

Scanfil issued a profit warning yesterday on its 2024 revenue and adjusted EBIT. Scanfil now estimates that its revenue for 2024 will be EUR 780-840 million (previous 820-900 MEUR) and its adjusted EBIT will be EUR 54-61 million (previous 57-65 MEUR). The company justified the changes with subdued demand in the beginning of the year, driven by economic uncertainty and high customer inventories. The profit warning was disappointing to us, although we considered the company’s earnings guidance optimistic already in the winter considering the European economic situation, and our earnings forecasts were at the bottom of the old guidance range and also inside the new range before the warning. The silver lining in the warning was that the clear cut in the revenue guidance did not lead to a drop in the earnings guidance with any kind of lever. As a result, we believe Scanfil has been able to maintain its margins and improve operational efficiency in terms of both overhead costs and production efficiency, as Scanfil typically (and the industry in general) has a slight result lever despite a flexible cost structure. Furthermore, with revenue falling, Scanfil should be able to release capital from the still elevated inventories and forge strong cash flow with the released working capital during the rest of the year. 

No need for a larger forecast revision despite the profit warning

After the profit warning, we cut Scanfil’s forecasts for the current year by 4% in terms of revenue and 2% in terms of adjusted EBIT. Our earnings forecasts for the next few years also decreased by some 2% in terms of revenue. We lowered our expectations of the slope of demand recovery for next year slightly (e.g. slower interest rate cuts than expected), although recent industrial macro data already shows cautiously positive signals when looking further ahead. This year we expect Scanfil's revenue and earnings to decline organically in a muggy economic environment and to end at the midpoint of the current guidance range. Next year, we expect the company to return to a fairly good growth trajectory as the economy picks up and slightly lower interest rates boost investment-driven demand. In our view, Scanfil’s main risks are related to demand that depends on the global economy (and partly on interest rates).

The valuation image is still moderate with all indicators

Scanfil’s adjusted P/E ratios for 2024-2025 based on our estimates are 12x and 10x, and the corresponding EV/EBIT ratios are 8x. This year's multiples are already below the company's moderate 5-year medians and the levels we accept for the company, and discounted relative to the peer group. Thus, we feel Scanfil'slow valuation, good 3% dividend yield and the earnings growth that will start after facing the Q4 comparison figures that start moderating generate a double-digit expected return for the stock within 12 months. DCF also indicates that the stock is cheap.