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Scanfil - Expect further robust results

We expect Scanfil to remain one of the contract electronics manufacturers with better positioning amid a perennially competitive market for outsourced industrial electronics production. We view Scanfil’s strength premised on quality control, competitive pricing and good relationships with its key customers. In our view Scanfil’s valuation is at an attractive level as the current multiples represent a discount of some 20% compared to its own historical averages. We rate the shares BUY, TP at EUR 4.75 per share.

Scanfil remains well-positioned strategy-wise

While Scanfil’s short-term success is dependent on its most important customers’ products (the ten largest accounts generate ca. 60% of revenues), and these large industrial OEMs often face cyclical demand, Scanfil’s plant network can serve accounts both in the early stages of a product cycle and industrial electronics that are already being manufactured at high volumes, meaning Scanfil is able to nurture initially small customers and in the longer perspective graduate them to more significant revenues. However, such development demands patience as it will take a few years to reach a couple of million in annual sales (and this is only a fraction of the tens of millions required to be recognized as a major Scanfil customer).

Scanfil set to grow both organically and inorganically

Scanfil targets organic growth of ca. 3% in 2019-20 and a slight improvement in operating margin (7% in 2020). In our view these remain realistic targets, although success could be hampered by the softening of demand for a major customer product. Scanfil is still committed to screening the German market for acquisition targets (after announcing a deal in May).

Both Scanfil and its peers valued at undemanding multiples

Scanfil has historically traded at EV/EBITDA and EV/EBIT multiples above 7x and 9x, while the company is currently valued at 5.7x and 7.4x (based on our 2019 estimates). This 20% discount is in line with the recent peer group development. We rate Scanfil BUY, our target price being EUR 4.75 per share.

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