Scanfil - Performance is unlikely to falter
We expect the Q3 margin softness will prove temporary
Scanfil’s Q3 revenue grew by 18.5% y/y and amounted to EUR 167.8m vs the EUR 165.5m/171.2m Evli/cons. estimates. The growth was for the most part attributable to Advanced Consumer Applications and Energy & Cleantech segments, while Medtech & Life Science continued to grow at a 12% y/y pace. Advanced Consumer Applications had to make many spot components purchases and excluding all such transitory items top line grew by 10.2% y/y. Component availability issues limited Scanfil’s ability to meet customer demand and the challenges also hurt relative profitability. We understand the component scarcity situation limited profitability to the tune of EUR 1.0-1.5m. Q3 EBIT amounted to EUR 9.5m (5.7% margin), compared to the EUR 10.8m/10.9m Evli/cons. estimates. The challenging component situation will not fade away for quite some time, however Scanfil’s comments indicate there should be no major earnings drag going forward.
Spot purchases’ margin dilution is likely to be transient
Inventories increased by 63% y/y and 24% q/q as Scanfil wanted to secure necessary components to meet strong customer demand. This had a negative impact on cash flow, but Scanfil sees the situation is under control and inventories should not grow much more from here on. The new normal, in terms of component availability challenges, might mean revenue streams related to component spot sourcing will begin to generate adequate margins already during the next few quarters.
In our view earnings growth is set to continue next year
We expect Scanfil’s Q4 EBIT to improve q/q and y/y; our EUR 12.5m estimate translates to a very good 6.9% margin. The company’s comments on customer demand and component pricing dynamics suggest favorable outlook for next year’s earnings. We expect organic growth to continue in FY ’22 at a 7% pace; we see Scanfil reaching a 6.6% EBIT margin then, which would translate to EUR 48.5m in EBIT. The Hamburg restructuring also supports earnings growth going forward. Scanfil is valued 7.8-8.6x EV/EBITDA and 10.1-11.7x EV/EBIT on our FY ’21-22 estimates. We retain our EUR 9 TP and BUY rating.