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EQS Group-News: Research Dynamics / Key word(s): Research Update Report on Schaffner Holding AG by Research Dynamics: FY15/16 resutls 2016-12-07 / 17:30 This report is published by Research Dynamics, an independent research boutique *Mixed FY 2015/16 results; Automotive the bright spot* *Revenue above guidance, EBIT tops our estimate* For the financial year ending September 30, 2016 (FY2016), Schaffner reported net sales of CHF185.6mn (-8.0% y/y, -8.5% in local currency), which was above the Investor Day management guidance of >CHF180mn but below our estimate of CHF189.2mn. The sales decline was primarily attributable to steep fall-off in demand in the Power Magnetics division (PM; 24.5% of sales) and modest decline in the EMC division (50.6% of sales), partially offset by strong display in the Automotive division (AM). EBIT decreased sharply to CHF1.6mn (-85.4% y/y), but beat our estimate of CHF1.3mn. Net profit amounted to CHF0.4mn, vs. CHF7.7mn in the previous year. *Segmental performance* *EMC*: The EMC division's sales came in at CHF93.8mn (-1.6% y/y), largely in-line with our estimate of CHF93.1mn, despite the challenging operating environment encountered by the company. The segment was hampered by weak demand from the photovoltaic sector and cost pressure in key markets, partly offset by positive momentum in the power quality business. The division's EBIT margin declined marginally (9.5% vs. 9.6% in FY2015) as cost rationalisation helped curtail the adverse impact of weak pricing and higher spending (particularly R&D) on the next generation of ECOsine harmonic filters. Management noted the strong 34% y/y growth in the emerging power quality business. Looking ahead at FY2017, management intends to continue gaining market share and increasing sales through the launch of new power quality products, which should reflect in profitability improvement as well. In addition, management intends to increase share of the division's sales from trading goods to 10% (from 3-4%, currently) in order to offer complete customer solutions and drive revenue growth. *PM*: The PM division's sales declined sharply to CHF45.4mn (-28.7% y/y) in FY2016, due to weak demand for global motor drive systems, photovoltaic inverters in Japan and rail technology, partly counterweighed by growth in the wind turbine application in China. The division reported an operating loss of CHF9.2mn (vs. EBIT of CHF1.6mn in FY2015). The operating loss was attributable to weak sales volumes and capacity rationalisation through consolidation of the North America and European factory operations. The division absorbed restructuring costs of CHF4.6mn for merging its plants in North America into a single location in Virginia. Looking ahead, management expects to focus on optimising the production capacity and driving sales recovery in key markets. Further, the cost benefit of closing down the factory in Germany should also accrue from FY2017. *AM*: Sales in the AM division rose strongly by 8.3% y/y to CHF46.4mn, well-above our estimate of CHF42.6mn. Sales growth was aided by strength of the global automobile market and demand for antennas for keyless entry systems. EBIT margin continued its upward trajectory, soaring to 24.5% in FY2016 (from 14.6% in FY2015), on account of operational improvements and competitive cost structure. In FY2017, the management expects to continue to gain market share in keyless entry systems, and also benefit from increased sales with EMC and battery filters for the EV filter market. *Unchanged mid-term targets* Schaffner's management stated that the economic environment and various customer industries continue to pose a challenge to the business. Management reiterated its medium-term targets of organic sales growth and EBIT margin in excess of 5% and 8%, respectively. Management also remains upbeat about the sustainable strength and underlying drivers in demand for electrical energy. Thus, an improving book to bill ratio (1.01 in FY2016 vs. 0.97 in FY2015) and rising order intake likely point to operating performance improvement in FY2017. *Regional diversification * Schaffner's largest sales contribution comes from China (25% of FY2016 sales). On regional basis as well, the company's operations appear to be well-diversified, which bodes well for tapping broad-based growth opportunities in future, in our view. *Impact of changeover to Swiss GAAP FER* Schaffner adopted Swiss GAAP FER (FER) reporting standards for financials from October 2015, a changeover from the International Financial Reporting Standards (IFRS). Accordingly, the company's numbers were restated, with the major impact seen on intangible assets (FY2015: CHF2.1mn compared to CHF22.1mn, reported previously). Since intangible assets were set off against equity, the equity per share number stood at CHF73.58 at FY2016-end (vs. CHF79.24 at FY2015-end), translating into an equity ratio of 37.9%. Given the expected focus on profitability, we expect the ratio to be north of the targeted 40% level by FY2017-end. *Board recommends zero dividend* In view of the reported results and dividend strategy, Schaffner's board recommended zero dividend payout to shareholders for FY2016 (vs. CHF6.50 per share in FY2015). However, over the medium-term, the company envisages stable dividend payout in the range of 25-35% of net income. We expect the payout to ramp up to the targeted level only gradually over the medium-term. *New board and management composition * In October, Schaffner's board of directors proposed to the AGM of January 12, 2017 the election of Urs Kaufmann (CEO of Huber+Suhner) as Chairman, and Philipp Buhofer (Schaffner's largest shareholder) as member of the board. We believe the new board composition should facilitate investor activism and expedite strategic decision making, including less reaction time to market trends and acquisition opportunities. Further, given the nomination of a new CEO is still pending following the departure of Alexander Hagemann in July, we expect the revamped board will ensure that the incoming CEO's thinking is in harmony with its strategic vision. *Discount to peers on 2017 estimates * In addition to operational changes, especially in its PM division, Schaffner is also undergoing management transition. Accordingly, valuations for the company continue to be largely at a discount compared to peers. Based on 2017 EV/EBITDA estimates, the company trades at a 6% premium to product peers and a 32% discount to industry peers. Looking at the 3-year average EV/EBITDA, the company trades at a discount of 12% to product peers and 9% discount to industry peers. Over the medium-term, key catalysts for the stock include strategy announcements by the new management team, potential turnaround in the PM division and growth trajectory of the AM division. Additional features: Document: http://n.eqs.com/c/fncls.ssp?u=ABTTXHLVHU [1] Document title: Schaffner_FY16_results_7.Dec16 End of Corporate News 527673 2016-12-07 1: http://public-cockpit.eqs.com/cgi-bin/fncls.ssp?fn=redirect&url=7d38b7c8c25ad7b6cee24280a387bbf7&application_id=527673&site_id=vwd&application_name=news
(END) Dow Jones Newswires
December 07, 2016 11:30 ET (16:30 GMT)
