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Scanfil - Q4 softness unlikely to persist

Scanfil’s Q4 EBIT didn’t meet our expectations. However, the weakened operating margin was attributable to Scanfil’s account idiosyncrasies. Certain contracts with above average profitability lacked volumes in Q4. Overall, the company sees business continuing as before, and we expect organic revenue growth to add around EUR 20m in 2019. 2020 sales target stands at EUR 600m. We update our target price to EUR 4.75 (4.60); our rating stays BUY.

Individual contracts determine quarterly segment results

Although Other Industries segment grew 18% in 2018, the segment’s Q4 results were weak due to a significant decrease in demand from a certain notable customer. Urban Applications Q4 top line declined by 12% y/y due to one or two accounts’ seasonal variation. In other words, the Q4 EBIT margin weakness was entirely attributable to a couple of accounts that are above average in terms of profitability. Broadly speaking, demand continued to develop positively and the company’s guidance for 2019 is in line with our earlier expectations. While individual accounts may have large impact on specific segment results, we expect MedTech, Life Science and Environmental Measurement to be the most stable performer. Conversely, within a segment such as Networks and Communication, it is hard to say when larger order volumes may materialize (i.e. when a standard such as 5G starts to have an impact).

Scanfil expects Q1 to be slower, demand to pick up in Q2

Scanfil says the year will have a sluggish start; the company expects clear demand pick up during the second quarter. The company is adding new customers particularly in Sweden. In addition to organic growth, initiatives such as a EUR 50m acquisition in e.g. Germany are not off the table.

Our rating is BUY, update target to EUR 4.75 (4.60)

Our long-term expectations for Scanfil are intact. Increased peer multiples provide lift for valuation, and thus we update our target price to EUR 4.75 (4.60) per share.

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