Report update on Schaffner Holding AG by Research Dynamics: Confidence boost to execution capabilities (News mit Zusatzmaterial)
DGAP-News: Research Dynamics / Schlagwort(e): Research Update
Report update on Schaffner Holding AG by Research Dynamics: Confidence
boost to execution capabilities (News mit Zusatzmaterial)
16.06.2014 / 07:00
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Rolling out new strategies
Schaffner on its investor day (held on 12th June 2014) confirmed its
commitment to its two-pronged strategy of top-line growth (through the
Power Magnetics and Automotive divisions) along with margin expansion in
all divisions. Besides the existing focus areas, the group uncovered few
additional strategic priorities with emphasis on growing market share in
North America and capitalising on cross-selling opportunities between
divisions being the top-most on the list.
Focus shift to North America
Schaffner's growth focus has primarily been geared towards Asia in recent
years. This is amply evident from the rising sales contribution from the
Asia-Pacific (APAC) region, which increased to 35% in H1FY2014 from 18% in
FY2008, mainly led by China. Schaffner benefited from expansion of
production facilities as well as developing products suitable for the
Chinese market, both in terms of costs and technology. The group has almost
achieved its 2015 objective to generate 40% of its revenue from the APAC.
Schaffner has drawn up plans to maintain its existing customer base in the
APAC region, but will be selective in China about enhancing its customers
base (lower risk from receivables defaulting), The company plans to
continue focusing on developing sophisticated products for Chinese
consumers that are becoming more technologically advanced. Schaffner is
also eyeing the renewable energy market in Japan, which offers huge
potential.
With the recent acquisition of US-based Trenco, the group is now targeting
to further expand its presence in the North American market, following its
success in this region. On the one hand, the shale gas boom has brought the
US again at the forefront of being the global growth engine. The shale gas
revolution has led to reduction in energy costs, which coupled with
increasing inflation in the emerging economies, is compelling companies to
consider shifting their manufacturing base back to the US. These so-called
"re-shoring" initiatives exist especially in industrial, engineered
products where Schaffner has a presence. On the other, hand the over-aged
infrastructure in many cities is need of modernization and upgrading, or
the transport system needs expansion. For example, Schaffner is now
involved in the building of a new mass rapid transit system in Honolulu. In
addition, the region also supports the growth of renewable energy, given
the available space and favourable climate conditions, and also has
energy-efficiency mandates in place. The group has significant exposure to
products used in energy-efficient drive systems (23% of its revenue in
FY2013) and renewable energy (18%). The acquisition of Trenco enables
Schaffner to gain access to the US regulatory-approved products and further
shores up its presence in renewable energy and energy-efficient drive
systems. The group generates 20% of its revenue (H1 FY2014) from Americas
following the Trenco acquisition from 16% earlier, and plans to further
increase it.
New Power Quality business unit to increase speed of growth
In order to shorten decision ways and react more quickly to market needs a
new business unit was set-up within the EMC division with dedicated, highly
trained specialists for engineering, product management and service. Where
so far Schaffner's products had very little maintenance component, the
increased use of harmonic filters in power electronics calls for more
after-sales services and life-cylce management, bringing the company closer
to the customer. Here, the group values the partnering with authorized
sales and service partners, but also with universities. Overall, thanks to
its innovation-driven nature, Schaffner believes that differentiation in
this core, but complex market of power electronics is possible with the new
set- up, which should support growth rates above 10% for Power Quality
products.
Emphasis on cross-selling opportunities between business divisions
Schaffner's products are complementary in nature, especially the offerings
of the EMC and the power magnetic divisions. In order to capitalize on
these opportunities, the group plans to focus more on cross-selling between
divisions. The two growth markets which lend themselves best to this task
are motor drives and smart grids wherein the EMC division already has a
strong hold, especially in filters for motor drives (market share of 20%).
The power magnetic division offers transformers with harmonic frequency
mitigation & filter inductors that are used in motor drives and grids. In
addition to the products, the group is planning to provide end-to-end
solutions, which will help in developing strong client relationship. The
acquisition of Trenco is expected to facilitate market entry in the US as
the group obtains access to its product designs and also to large
conglomerates, which would have been difficult for Schaffner to gain on its
own. The motor drive market is currently sized at CHF105mn and is expected
to grow at a CAGR of 9% over the near-term, while the smart metering
sub-market for example is anticipated to grow at 15% per annum. Thus, this
opportunity, if successfully addressed, will significantly benefit
Schaffner in tapping the potential of both of these markets.
Consolidating growth and margin-enhancing products
Schaffner places huge emphasis on developing innovative products, which is
evident from the amount of R&D expenditure it incurs every year (~8% of
revenue in FY2013), reportedly the highest among peers. For e.g. in the
automotive division, 50% of the current portfolio of products has been
launched in the last three years. In power quality under EMC, the latest
launch (June 2014) has been a 100/120A harmonic filter that will be used in
marine applications, which thereby opens up an entirely new end-market for
the group. Moreover, Schaffner is also developing a new product named
switching frequency filters for which the regulations are favourable and
these products find use in wide applications viz. motor drives (opportunity
of EUR30mn), photovoltaic (EUR120mn) and wind (EUR112mn). In addition to
its top-line growth, the group's efforts to develop innovative products
also aid in margin enhancement. Schaffner's integrated CM/DM inductors
reduce the size and cost of the product by half. These products in addition
to the continuation of lean manufacturing are expected to keep the group on
track to achieve its mid-term targets.
Investor day update boosts confidence in the company's execution
capabilities
In addition to the continuation of its previous strategy, the company's
newly-introduced plan to focus on North America and explore the
cross-selling opportunities is expected to be beneficial for the group to
achieve its mid-term targets. Schaffner confirmed its FY2014 (10-15% net
sales growth at 7% EBIT margin) and mid-term targets (net sales between
CHF260-290mn). Management also reiterated that the current organisational
set-up will support surpassing the CHF 300 million mark with little
additional costs (no new manufacturing plants, no new management layers)
and thus the operational structure is highly leveraged, supporting the
targeted margin expansion to 9-12% for the group by FY2015/16. This
unchanged outlook highlights that the execution is on track and supports
our conviction that the group has embarked on its growth story. We make no
changes to our model as we already are at the top end of the earlier
provided guidance and we would prefer to wait for these new measures to
take shape.
The company also mentioned the following trends globally, which will help
it to grow in the medium to long term:
- Renewing infrastructure and modernisation in the US and Europe. The
company recently got involved with the upgradation of Bordeaux Metro
power substations to 690V; this alone provided opportunity in the upper
6-digit figures for the company.
- The two big economies offer favourable environment: Japan which is
moving from nuclear to renewable while in the US, the regions like
Texas, Arizona provide a perfect environment for development of the
renewable industry.
- Growing automation in China aids the growth of this industry. As the
government continues to invest in infrastructure and there is a trend
towards localization of high-tech industries, we will see a continued
growth in the industry
- Increasing regulation globally. As EMC filters eliminate electrical
noise to ensure safe operation of electronic equipment, the
increasingly stricter regulatory environment bodes well for the company
and the industry.
- In the automotive division, increased demand for electric vehicles is
seen from the long waiting list of the latest electric vehicles
launched by BMW (e.g. i3). We will also see many more me-too products
in the market, providing further fillip to the industry
- The company is also witnessing a move by clients towards consolidating
their vendors. This will further enable the market to consolidate in a
fragmented industry (top 20 players have only 30% market share in power
magnetics). This works well for the company as it is a market leader
and also has embarked on a buy-and-build strategy.
Valuation
The stock looks attractive even after the recent run up (18% YTD vs 9% for
SPI); on 2015 multiples it currently trades at a discount of 14%, 13% and
21% on EV/EBITDA, EV/EBIT and P/E basis to its product peers, respectively.
And at a discount of 34% on both EV/EBITDA and EV/EBIT and 41% on P/E basis
to its industry peers. Given the improved visibility we believe the
discount still offers an attractive entry point.
Ende der Corporate News
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Zusatzmaterial zur Meldung:
Dokument: http://n.equitystory.com/c/fncls.ssp?u=EESARSNYLI
Dokumenttitel: Confidence boost to execution capabilities
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16.06.2014 Veröffentlichung einer Corporate News/Finanznachricht,
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