Default template for Word · Growth in the market likely to remain Traditional EMS market growth...

Commissioned research 6 April 2018

Marketing material commissioned by Scanfil Oyj

Scanfil Oyj Electrical Equipment | Finland

KEY DATA

ABSOLUTE & RELATIVE PERFORMANCE

Source: Thomson Reuters

VALUATION APPROACH

Source: Nordea Markets

Nordea Markets - Analysts Pasi Väisänen Senior Analyst

Harri Taittonen Chief Analyst

Scanfil’s time to shine An unnoticed jewel Electronics manufacturing services (EMS) player Scanfil is active in the electronic device subcontractor market, which is set to grow by over 6% globally per year, according to IDC. As a subcontractor, Scanfil’s success is highly dependent on its customers’ performance, and we believe the recent improvement of the global economy should help a lot in this respect. The company has what we consider to be the right strengths in the very competitive EMS sector, allowing it to protect its market position. We also believe that the operating margin improvement seen last year will continue this year. A survivor in a competitive industry Scanfil has faced several difficult years, but has emerged a survivor. The core strengths we see in the company are its elastic business model and extensive experience in the EMS sector. We also note that risks related to individual customers have come down via increased sector diversification. The company’s proactive management has enabled it to avoid being loss-making. We believe Scanfil’s product quality, production speed, procurement and input costs are just some of the reasons why the company is still a key player in the competitive subcontractor sector Valuation is slightly below the sector median We expect market demand for EMS subcontractors to remain strong for the next ten years at least. Increased digitalisation, along with new solution areas like robotics, 5G and IoT, should lead to 6%-plus market growth for EMS companies, we forecast. Subcontractors have always had a relatively low but tight range of valuation multiples. Small subcontractors typically trade at a small discount compared to larger competitors. We do not expect Scanfil to grow faster than the industry and therefore do not find a clear premium compared to peers warranted. We base our fair value on a combination of peer group and DCF analysis. The equally weighted range from our four different valuation approach drivers (DCF, P/B, EV/EBITDA and P/E) is EUR 4.8-5.9.

Source: Company data and Nordea Markets

Country FinlandBloomberg SCANFL:FHReuters SCANFL.HEShare price 4.52Free float 40%Market cap (m) EUR 288 MWebsite scanfil.comNext report date 26 April 2018

0.000.501.001.502.002.503.003.504.004.50

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Scanfil share price OMX Helsinki Index

1M 6M 12M YTDAbsolute -0.7% 4.7% 27.8% 5.9%Relative 1.3% 8.1% 25.1% 6.5%

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SUMMARY TABLE - KEY FIGURESEURm 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020ENet sales 219 211 181 189 215 377 508 530 558 579 601- grow th 11% -4% -14% 4% 14% 76% 35% 4% 5% 4% 4%EBIT (adj.) 14 9 8 12 16 20 22 31 36 38 40- margin 6.6% 4.3% 4.2% 6.4% 7.6% 5.3% 4.4% 5.9% 6.4% 6.5% 6.6%EPS (adj.) 0.19 0.11 0.09 0.15 0.22 0.24 0.24 0.36 0.42 0.44 0.47- grow th -23% -42% -17% 64% 46% 12% -1% 51% 16% 7% 6%DPS 0.12 0.06 0.04 0.05 0.07 0.08 0.09 0.11 0.14 0.15 0.15P/E (adj.) 15.8 18.0 9.1 9.1 11.4 15.7 14.6 11.8 10.9 10.2 9.7EV/EBIT (adj.) 10.7 14.8 8.0 5.6 8.1 14.3 11.7 10.0 8.9 8.2 7.5EV/Sales 0.7 0.6 0.3 0.4 0.6 0.8 0.5 0.6 0.6 0.5 0.5ROE% 5% 8% 11% 14% 9% 0% 22% 20% 18% 17% 16%Div. yield 4.0% 3.1% 4.9% 3.7% 2.8% 2.1% 2.6% 2.6% 3.0% 3.2% 3.4%FCF yield -5% 21% -12% 24% 2% -17% 6% 4% 6% 7% 7%NetDebt/EBITDA -0.9 0.9 0.6 -0.4 -0.4 2.4 2.2 1.1 0.7 0.5 0.2

6 April 2018 Scanfil Oyj

Marketing material commissioned by Scanfil Oyj 2

Table of contents Factors to consider when investing in Scanfil .................................................................................. 3

Valuation .......................................................................................................................................... 6

Company overview ......................................................................................................................... 12

Market overview: The subcontractor sector ................................................................................... 22

Competition .................................................................................................................................... 28

Historical financials ........................................................................................................................ 34

Detailed estimates .......................................................................................................................... 39

Sustainability issues ........................................................................................................................ 47

Risk factors ..................................................................................................................................... 49

Peer group ...................................................................................................................................... 51

Reported numbers and forecasts ................................................................................................... 53

Disclaimer ....................................................................................................................................... 56



Factors to consider when investing in Scanfil As a subcontractor, Scanfil’s success is highly dependent on its customers’ demand. In fact, customer product portfolios drive growth more than overall GDP or sector growth. Furthermore, a subcontractor does not usually hold the best position in the vertical value chain. However, Scanfil’s proactive management, cost discipline and elastic business model have enabled it to reach even better margins than the sector average. Recently, Scanfil has gained new speed from the medical device sector, and in the past three years, the company’s clean EBITDA has risen by 50%. We see future potential in several customer segments.

We consider the following factors key when evaluating an investment in Scanfil: • Global digitalisation and electrification continue to grow, offering steady growth

for electronic device subcontractors.

• Technical innovations create new demand for subcontractors, like 5G networks, robotics, MedTech, Internet of Things (IoT) and virtual reality.

• Scanfil has a durable business model, production units are flexible, cost discipline is good and customer loyalty is high.

• Scanfil has a proven strategy with plants based in three main continents close to either customers’ R&D units or the end markets.

• The company focuses on industrial solutions, where economy of scale is not as important as it is in consumer electronics.

• Dividends and EPS have not declined for the past five years y/y and we expect this growth trend to continue.

Key risk factors: • Scanfil is dependent on its customers. Any disturbance in the customer product

portfolio or in end demand is visible in Scanfil’s growth and earnings potential.

• In a relatively mature industry, competition is fierce and there is continuous price pressure from OEMs. Scanfil’s pricing power is somewhat limited.

• Cyclicality is strong and valuation multiples in the EMS sector are typically modest.

• Its relatively small size reduces its ability to engage new large customers on an organic growth basis. However, Scanfil does not operate in the consumer electronic sector, so greater size is not even necessary.

• Acquisitions have increased interest bearing debt to over EUR 60m. The balance sheet already includes EUR 25m of intangibles.

• A full description of the company-related risks can be found in the “Risk factors” section in this report.

Printed circuit board assembly for industrial customers Scanfil is an international electronic component contract manufacturer for industrial customers. Scanfil’s plants offer printed circuit board assembly (PCBA), sheet metal mechanics, electronics, wire harnesses, as well as final and tested modules and products. The main expertise and customer segment has been network devices in the telecommunications sector.



The company’s strength is its high-mix and low-volume products where a larger scale is not always needed. Today, the company has 10 plants, two of which are in China. Among the company’s customers are names such as Kone, Thermo Fisher Scientific, ABB, Metso, Nibe, Airbus, Teleste, Nokia and Danfoss.

Strong market growth is likely to continue

A subcontractor model has proven to be value creative

Growth in the market likely to remain Traditional EMS market growth was 8% on average during 1999-2017 (IDC). If global GDP growth is 3%, the electronics market has offered an additional 2% growth, and on top of that, the EMS market has offered an additional 3% growth via an increase in the outsourcing ratios.

This strong market growth is likely to continue, in our view, owing to new products, innovations and the overall digitalisation of services. A subcontractor model in the OEM electronics industry has also proven to be value creative, which is why we do not expect to see a change in the industry’s business model. However, large OEMs continue to squeeze subcontractors, and we therefore expect margin pressure to persist. Scanfil’s strategic strengths are speed, price, flexibility and reliability, meaning the company’s position in the market should not be under imminent risk, in our view.

We do not forecast higher revenue growth for Scanfil than in the market. Many of the company’s customers are in a stable phase and not increasing their outsourcing ratios in manufacturing operations. For Scanfil, we believe any additional growth over the 4% financial target will be mostly achieved through acquisitions. One good example was the PartnerTech acquisition in 2015. In the future, the company could put more focus on the German EMS market, making some minor acquisitions in 2018-19 possible, we argue.

Scanfil’s core strengths are its customer base, flexibility, quality, speed and price

Scanfil has the right strengths For any EMS provider to attain an acceptable level of customer satisfaction, it must maintain focus on delivering a quality product in a timely manner and at a competitive price. We consider Scanfil’s core strengths to be its current customer base, flexibility, low-volume capability, speed, price and OEM relationships. These are the reasons why the company has survived amid fierce competition while others have fallen. The company-specific risk factors, looking at strategy and position in the value chain, are not higher than for peers, we argue.

A traditional EMS business generally enjoys economies of scale benefits. Vertical integration and low cost countries have been driving the market behaviour for several years but Scanfil has been able to identify its own niche market, which has meant that economies of scale are not the main driver for the company’s success in the global EMS industry, we argue. Scanfil has stayed away from consumer electronics, which we believe has been the right strategy.

Recently, the company has also proven that it is capable of successful M&A activity with its acquisition of PartnerTech. We believe the acquisition was made at a relatively low price and that integration went well. Thus, PartnerTech has been value-creative for Scanfil’s equity holders, we argue. In the future, the company could turn its focus to the German EMS market in terms of acquisitions.

A bigger risk is related to revenue growth rather than the operating profit margin, we argue

Financial targets appear realistic If the company is able to reach EUR 600m in revenue by 2020 and post a 7% EBIT margin, as stated in the financial targets, its EPS could reach EUR 0.51. At a 2020E P/E of 13-14x for the company, this would imply a share price of EUR 6.6-7.1, we calculate.

A bigger risk is related to revenue growth rather than the operating profit margin, we argue. The company’s medium-term financial targets include 4.2% annual revenue growth for 2018-20 but long term organic growth has been lower than that. However, the EBIT margin could improve further from last year. The current EBIT margin is 6% vs our forecast for 2020 of 6.6%. We believe there could even be room for a positive margin surprise up to an EBIT margin target of 7.0%.



Valuation We use relative valuation and a DCF-based fair value calculation in our analysis. We believe that peer group multiples are very informative and give a relevant view for the subcontractor sector and for our company analysis. The electronic subcontractor sector valuation is more broadly presented in the “Valuation” section in this report.

A sum-of-the-parts analysis does not add more information to the valuation because the business model is not very capital intensive and the company does not hold IPR for the components it produces.

Based on the assumption that the company can deliver revenue growth and an operating profit margin in line with our expectations, we estimate a fair value range of EUR 4.8-5.9 per share, which is an equally weighted range based on our four different valuation approach drivers (DCF, P/B, EV/EBITDA and P/E). This valuation range is visible in red lines in the following picture.

VALUATION APPROACH


Based on our DCF framework and WACC assumptions of 6.5-7.8%, we derive a fair value range of EUR 5.3-6.5 for Scanfil.

Our P/E valuation range of EUR 4.9-6.0 per share for Scanfil has been calculated by taking this year’s EPS forecast of EUR 0.42 and multiplying it by the accepted valuation multiple range of 11.7x-14.3x, representing a midpoint of 13x. This P/E valuation range represents Nordea Markets view and it has been derived from the company’s previous years and the historical sector median figures.

Similarly, the P/B valuation range has been calculated by taking the company’s average book value from years 2018-19 and multiplying it by the accepted P/B valuation range of 1.8x-2.2x, indicating a mathematical midpoint of 2.0x. As an outcome, this calculation gives then a valuation range of EUR 4.3-5.3 per share for Scanfil as seen from the previous picture.

Furthermore, in our approach we use 7.3x-8.7x EV/EBITDA multiple range to calculate one component of the fair value analysis. By taking into account that the company has net-debt of EUR 33m according to our estimates the respective market capitalisation per share would then EUR 4.6-5.6.

Risk factors There are several bigger and smaller risks related to Scanfil investment case. We believe the biggest risk is the end demand variation in the sectors in which Scanfil’s customers operate. Also the competitive strength of the customer product portfolios is a risk factor. However, the customer base is now more evenly distributed than it has been for decades, reducing the customer related risks. Furthermore, we do not find remarkable risks from the balance sheet, raw materials, first-pass yield or competition. Scanfil has already proven to be very competitive and we do not expect the company to lose this ability in near term.

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Valuation Combined with new smart solutions like robotics and IoT, we believe digitalisation should offer around 6%-plus market growth for EMS companies during 2018-20. However, a majority of Scanfil’s customers are already in a mature phase, so we do not expect the company to beat market growth. This is also one of the reasons Scanfil will have slightly lower P/E than the sector median, we argue. Furthermore, a small subcontractor usually trades at a discount to tier 1 competitors. However, the company’s earnings volatility is low and return on invested capital is high, so we argue that Scanfil should not trade at remarkably lower multiples than its peers. Our DCF-based fair value is EUR 5.3-6.5 per share for the company. Based on a P/E of 13x and EV/EBITDA of 8.0x for the company, we believe the share price should be EUR 4.6-6.0.

We are largely in line with consensus on 2018E revenue and operating profit…

…but do not expect to see a medium-term financial target of 7% in 2018 or 2019

Market consensus EBIT for 2018E is realistic In its full-year outlook, Scanfil issued guidance for 2018 revenue of EUR 530-570m. Consensus is slightly over the mid-point of guidance. Our revenue growth forecast for 2018 is in line with market consensus. We believe the company’s internal target is also likely over the midpoint of EUR 550m. This also would mean that the company needs to perform very well to be able to post a positive surprise in 2018.

We forecast 2018 operating profit of EUR 36m, which is largely in line with consensus. Scanfil has had a relatively low EBIT margin for years and it will not be easy for the company to achieve a margin of over 7%, in our view. Although expectations have started to rise after a solid 2017, we do not expect to see a medium-term financial target yet in 2018 or 2019.

Our Q1 2018 EPS forecast is EUR 0.01 lower than market consensus. We believe the seasonality and the production mix difference between Q4 and Q1 is slightly stronger than forecasted by the market consensus. Indeed, Q4 2017 was remarkably strong for the company. We also note that most of the customer order and revenue volatility is coming from Urban Applications and Other Industries segments.

NORDEA ESTIMATES VERSUS THE MARKET CONSENSUS

Source: Thomson Reuters and Nordea Markets

The average P/E for the company over the past 17 years has been 12.8x, but the multiple has varied between 9x and 17x. Subcontractors have always had relatively low valuation multiples, within a tight range.

The EMS sector’s historical average P/E was 15.1x in 2001-17, which we consider an upper limit for the company’s valuation in the near future. In our view, Scanfil may not be able to keep pace with market growth on its annual revenue growth. For this reason, Scanfil’s P/E may stay slightly under the sector median. For 2018E, Scanfil’s P/E is 22% under the sector median. For 2019E, the difference is 13%.

Nordea estimates Consensus estimates Difference %

EURm Q1 2018E 2018E 2019E 2020E Q1 2018E 2018E 2019E 2020E Q1 2018E 2018E 2019E 2020E

Sales 136 558 579 601 134 553 567 581 1% 1% 2% 3%Adj. EBIT 8 36 38 40 9 36 37 39 -3% 0% 2% 3%Adj. EBIT margin 6.1% 6.4% 6.5% 6.6% 6.3% 6.5% 6.5% 6.6% -0.2pp -0.1pp 0.0pp 0.0ppAdj. EPS 0.10 0.42 0.44 0.47 0.11 0.44 0.43 0.45 -13% -5% 3% 3%



SCANFIL P/E AND SECTOR MEDIAN


Scanfil has had a low 5.6x average EV/EBITDA multiple over the past 17 years

EV/EBITDA in line with sector median For 2016-18E, the EV/EBITDA valuation appears to be relatively close to sector median multiples. Over a longer period, however, the difference has been even more profound, at 38%. Indeed, we calculate that Scanfil has had a low 5.6x average EV/EBITDA multiple over the past 17 years, while sector peer companies saw an average of 7.7x over the same period.

The recent positive momentum in the share price has essentially closed the valuation gap on EV/EBITDA for 2018E-20E.

SCANFIL EV/EBITDA AND SECTOR MEDIAN


Long-term sector average P/B has been 1.6x

Sector median P/B has been 1.6x The EMS industry as a whole has traded between 1.0x and 2.0x in terms of P/B valuation. The long-term sector average is 1.6x, which should be a lower comparison point for Scanfil, in our view.

Scanfil’s long-term average P/B is 1.5x, indicating a 7% discount valuation to the sector average. However, the company’s P/B exceeded the peer average in 2015 and has remained above since. The main reasons for the improvement were the PartnerTech acquisition from Sweden and higher ROE% expectations, in our view.

The median return on equity has been 9.6% for Scanfil, but 10.1% for the EMS sector. In our view, this small spread explains the tight historical P/B difference.

Based on our estimates, P/B is about in line with the sector for 2019 and we maintain a 2.5x P/B multiple as an upper limit in the valuation. Our forecast for Scanfil’s return on equity is 16-20% for the coming years, meaning the company should not trade at a discount to peers.

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SCANFIL P/B AND SECTOR MEDIAN


Looking at a regression analysis including 47 peer companies, we can see that Scanfil is slightly undervalued on 2018E revenue growth and P/E multiples. However, the correlation between P/E and revenue growth in the sector is not very strong.

Return on equity correlates better with P/B valuation in the sector, as shown in the graph below. Last year Scanfil reached a 22% return on equity with a P/B of 2.2x.

SECTOR P/E AND GROWTH REGRESSION ANALYSIS


SECTOR P/B AND ROE REGRESSION ANALYSIS


Annual dividend should stay in growth mode Following the Eurozone crisis and the demerger of Sievi Capital, the company has been able to increase dividend payments yearly. Because of the leap to the bigger size and the successful PartnerTech integration, there is a possibility for the company to increase dividend payments in relation to the historical trend. However, we believe the board favours stable dividend development rather than a maximum payout as investors tend to value good dividend predictability and stable growth over high volatility. If the company opts to raise dividend payments sharply in 2018, there could be a risk of a dividend cut later on, which we believe the board will most certainly want to avoid.

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DIVIDEND PER SHARE FORECAST, EUR


Sector average dividend yield has been 2.8% Scanfil has been able to offer a better dividend yield than the EMS sector on average. However, for 2018E-19E, its dividend yield is already in line with peers. The dividend yield will remain close to 3% in 2018E-20E, on our estimates. Pure dividend companies tend to operate in more stable sectors than the electronics manufacturing industry.

SCANFIL DIVIDEND YIELD AND SECTOR AVERAGE

Source: Company data, Thomson Reuters and Nordea Markets

DCF valuation range is EUR 5.3-6.5 One of the most common ways to value the attractiveness of an investment opportunity is the discounted cash flow (DCF) method. A DCF model discounts all available cash flows for equity, bond and non ‐equity holde hted average cost of capital (WACC). In other words, WACC represents a blended cost of capital for all invested capital in the company. In fundamental terms, a DCF framework is built on three parts: 1) Discounting the company’s free cash flow at WACC, 2) Identifying the value of debt and other non-equity claims on the enterprise value, and 3) Deducting all claims to determine the value of the common equity.

The fair value per share is then simply calculated by dividing the equity value by the number of outstanding shares. A DCF valuation is commonly considered among academics and practitioners to be the best way to capture the underlying fundamental drivers of a company such as cost of capital, growth rates, reinvestment rates etc. If applied correctly, it represents the best way to approximate the true intrinsic value of a company.

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The main appeal of a DCF framework compared with other valuation methodologies is that it also focuses on streams of cash rather than accounting earnings. Its main disadvantage is its relative sensitivity to changes in input values.

Annual cash flow from operations has been some EUR 20m in the past but we expect this to improve. We expect to see more than EUR 30m in cash flow from business operations, from which investments would take a little over EUR 10m, leaving EUR 17-20m in annual free cash flow in 2018-20.

Based on the assumption that Scanfil can deliver broadly in line with our forecasts, with variations in sales growth, EBIT margin and WACC assumptions of 6.5-7.8%, we arrive at a fair DCF-based equity value range of EUR 5.3-6.5 per share. In the terminal period, we model 2.5% growth. The assumptions behind our WACC are outlined in the table below.

WACC ASSUMPTIONS


DCF VALUATION


To highlight the sensitivity of the DCF valuation, we also provide sensitivity matrices modelling variations in revenue growth, margin assumptions and cost of capital. The sensitivities in our WACC are outlined in the following table.

WACC VERSUS EBIT MARGIN


WACC VERSUS SALES GROWTH


We use a stringent valuation framework setting ROIC under WACC in the terminal period, which prevents the model from extrapolating above‐market returns in perpetuity. A little under half of the value (48%) is distributed in the coming ten years, and 94% within our 30‐year estimate cycle, according to our calculations.

WACC componentsRisk-free interest rate 1.5%Market risk premium 5.5%Forw ard looking asset beta nmBeta debt 0.10Forw ard looking equity beta 1.3-1.5Cost of equity 8.4-10.4%Cost of debt 4.0-5.0%Tax-rate used in WACC 23.0%Equity w eight 61.0%WACC 6.5-7.8%

DCF value Value Per shareNPV FCFF 372-448 5.8-7.0(Net debt) -43 -0.7Market value of associates 0 0.0(Market value of minorities) 0 0.0Surplus values 0 0.0(Market value preference shares) 0 0.0Share based adjustments 0 0.0Other adjustments 0 0.0Time value 9 0.1DCF Value 338-415 5.3-6.5

5.1% 6.1% 7.1% 8.1% 9.1%+2.0pp 9.9 7.9 6.6 5.6 4.8

Sales gr. +1.0pp 9.1 7.4 6.2 5.3 4.6change 8.5 7.0 5.9 5.1 4.4

-1.0pp 7.9 6.6 5.6 4.9 4.3-2.0pp 7.5 6.3 5.4 4.7 4.1

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5.1% 6.1% 7.1% 8.1% 9.1%+2.0pp 14.1 10.3 8.3 6.9 5.9

EBIT marg. +1.0pp 10.9 8.6 7.1 6.0 5.2change 8.5 7.0 5.9 5.1 4.4

-1.0pp 6.1 5.3 4.7 4.2 3.7-2.0pp 3.6 3.7 3.5 3.2 3.0

WACC



DCF VALUE DISTRIBUTION TIMELINE


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94%



Company overview Scanfil is an international electronics device manufacturer and systems supplier for the telecommunications and electronics industries. Scanfil offers production, manufacturing and after-sales services in Europe, Asia and the US. From a global perspective, Scanfil is still a small company with some 3,300 workers. However, the company’s strength is its high-mix and low volume products, where a bigger size is not always needed. Furthermore, Scanfil operates in the industrial sector and not in consumer electronics, making a broader global footprint unnecessary. The company has ten plants, two of which are in China.

Scanfil is an electronics subcontractor company Scanfil is an international electronic device manufacturer and systems supplier for the electronics industry. It is a full-service company offering services in supply chain management, logistics, product design, product planning, volume manufacturing of products, prototype production and after-sales services. The core of its customer offering is a vertically integrated service and component production. Scanfil is best known for its printed circuit boards (PCB) assembly made for industrial customers.

THE MAIN SERVICE IS PCB ASSEMBLY FOR INDUSTRIAL CUSTOMERS

Source: Company data

The majority of its product offering is high-mix/low-medium volume products and it also offers integration and product development services, sheet metal mechanics, electronics, wire harnesses, as well as assembled and tested modules and products. Scanfil operates close to its customers and is present in Europe, China and the US.

SCANFIL’S PRODUCTION LOCATIONS




Company history Scanfil was founded by Jorma Takanen in 1976. In the early years, the company made metal mechanics in Sievi, Finland and expanded into electronics in the 1980s. In 1990, Scanfil expanded its production site and built a new plant in Oulu, the city that was at the centre of the telecom industry in Finland.

Merged with Wecan in 2002 Around the year 2000, the telecom industry experienced a structural change, as many clients moved their data network and industrial electronics production to low-cost countries. Scanfil’s response was to go abroad and it opened its first foreign subsidiary in Hungary.

In 2002, the company went public and merged with Wecan. Through this merger Scanfil expanded its operations to China and Estonia. Wecan has a strong financial position when the telecom investment downturn hit the subcontractor sector 2001, so the merger did not increase the risk levels in Scanfil. Wecan did not have interest bearing debt at all and cash flow was positive. Wecan delivered GSM and 3G solutions (motherboards, cables and modules) for Nokia, which was 95% of the company’s revenue. Wecan owners eventually got 14% of the combined company. One interesting detail is that the company was listed but the free float of the company’s shares was only 5%.

In the year it merged, Scanfil received about one-third of its revenue from industrial electronics and two-thirds from telecommunications. From Nokia’s point of view, the new Wecan-Scanfil company was a better size, with more credibility. In fact, Nokia could be considered one of the main players when the subcontractor sector started to consolidate.

After the merger, Scanfil set a target for EUR 1bn in revenue, with growth in Asia targeted in particular. In 2003, challenges were still mostly related to the relatively large Nokia account and to production being mainly in Europe. At that time, seven of its ten plants were in Finland.

In 2003 Scanfil acquired Alcatel’s ADSL business

In 2003, Scanfil increased its customer portfolio by acquiring a (Hoboken) production unit from Alcatel. Scanfil became an important ADSL device manufacturer in Europe. After the Alcatel deal, Scanfil acquired an electronics manufacturing unit from Metso. We believe Metso had a need to enter China and the contract with Scanfil was one way to execute this plan. Later in the year, Scanfil took on Vacon as a customer.

In 2004, Scanfil gained a plant in Hangzhou by acquisition and Nokia started to make 3G networks in China (Suzhou) where Scanfil already had a production unit. In the same year, network operators started to invest again, which created good growth and expectations for the whole subcontractor sector.

The medical, industrial and aerospace segments represented only about 12% of the EMS market in 2005 while telecom and computers dominated with some 66% of the total market. Today, medical and healthcare solutions play a clearly bigger role. This is also visible in Scanfil’s customer base. In fact, US-based medical company Thermo Fischer Scientific is now one of Scanfil’s biggest customers.

In 2008, an investment company, Sievi Capital, became its own legal entity

In 2008, Scanfil split its manufacturing and investment operations into two legal entities but the final demerger was not executed until 2012. The contract manufacturing stayed under Scanfil, whereas its investment operations became a separate unit called Sievi Capital. Overall, the financial crisis was not as bad for Scanfil as the Eurozone crisis in 2011. This highlights that customers are key to the success of the company, more than global GDP growth.

PartnerTech acquisition in 2015

One of the biggest events in the company’s history happened in 2015, when Scanfil acquired the Swedish company PartnerTech AB, which more than doubled its turnover, number of employees, production facilities and customers. Immediately after the deal, Scanfil initiated a large transformation in order to integrate PartnerTech. It eliminated overlapping functions and closed down unprofitable plants. While undergoing the integration transformation, it also kicked off an



investment programme that doubled the production space in several factories, invested in new machines and moved machines from the closed factories to its remaining factories in order to increase manufacturing capacity. This strategy looks to be the right move and will eventually be visible in the company’s market capitalisation, we argue

A PCB is the physical board that holds and connects all of the electronic components

Printed circuit board assembly (PCBA) is its main service offering Scanfil offers printed circuit board assembly. A PCB plate mechanically supports and electrically connects electronic components using conductive tracks etched from layers of copper laminated onto a non-conductive substrate. This PCB assembly forms a core part of all electronic manufacturing service company offerings.

Scanfil’s PCBA services vary from the initial production of very low volumes (NPI, EVT, PVT) and rapid prototype products, all the way through to the manufacturing of complex, multi-technology PCB assemblies.

THE MAIN PRODUCT IS PRINTED CIRCUIT BOARDS


PCB ASSEMBLY LINE


Scanfil uses surface mount technology (SMT) in electronic assembly to mount components on the surface of the printed circuit board (PCB) rather than inserting components through holes, as with conventional assembly. SMT methodology in the sector was originally developed to reduce manufacturing costs and to make more efficient use of PCB space.

The first machine in this SMT process is the solder paste printer, which is designed to apply solder paste to the appropriate pads on the PCB using a stencil. This is the most widely used method for applying solder paste but jet printing is growing in popularity, especially in the subcontractor sector as the lack of stencils makes modifications easier to apply.

Once the printed circuit board has been confirmed to have the correct amount of solder paste, it moves to component placement. Each component is picked from its packaging using either a vacuum or gripper nozzle, checked by the vision system and placed at the programmed location at high speed.

When all components have been placed and checked, PCB assembly moves to the reflow soldering machine where all the electrical solder connections are formed between the component and the PCB by heating the assembly to a sufficient temperature. After this phase the only thing left to do is once again check that no mistakes have been made by using an automated optical inspection machine to check solder joint quality.

In addition to this core PCB assembly, Scanfil offers a wide range of services to support customers’ products through their entire life cycle. The company has vertically integrated production and offers design, assembly, mechanics manufacturing, electronics integration, material management, logistics and after-sales services.



By looking at the main volume product category, Scanfil specialises in the manufacturing of mobile and communications network devices, automation of system modules, frequency converters, lift control systems, analysers, various slot and vending machines and devices related to medical technology and meteorology.

The main capacity metric is usually the square meterage in the assembly plants

The main capacity metric for the PCB makers, such as Scanfil, is usually the square meterage in the assembly plants. Another metric sometimes used is the number of personnel but this is more commonly used on the consumer electronic side, where Scanfil is not present.

Scanfil has a total of ten plants in seven countries, on three continents. Smaller plants in Finland, Sweden and Germany are located close to the customer’s R&D units. Its bigger volume plants in China, Poland, Estonia and the US are mainly located close to customers’ end markets. In many cases, it makes sense to produce the final components as close to the original point of use as possible. However, smaller prototypes are usually made close to R&D operations rather than end markets.

SCANFIL PRODUCTION SITES

Strategy Scanfil’s mission is to enable customers to succeed by providing effective and innovative solutions. Its vision is to be a trusted partner for its customers and differentiate with its best-in-class performance. In other words, Scanfil’s strategy is to keep current customers mainly through its quality, speed and price. We can already

Sievi, Finland Pämu, Estonia Hamburg, Germany Suzhou, China Hangzhou, ChinaFloor area Floor area Floor area Floor area Floor area26,000 16,000 3,200 21,000 36,500

Personell Personell Personell Personell Personell260 610 80 520 400

Working areas Working areas Working areas Working areas Working areasSheet metal mechanics, mechanical assembly, system integration, testing

Sheet metal mechanics, assembly, busbar, system integration, testing

Custom-specific design, assembly, testing

Assembly, system integration, testing

Sheet metal mechanics, assembly, integration, testing

Malmø, Sweden Åtvidaberg, Sweden Sieradz, Poland Myslowice, Poland Atlanta, USAFloor area Floor area Floor area Floor area Floor area4,500 14,500 10,000 12,000 5,500

Personell Personell Personell Personell Personell130 160 520 250 90

Working areas Working areas Working areas Working areas Working areasElectronics, including PCBA, box build and prototyping

Prototype and serial production, assembly, testing, configuration

Complete range of electronics manufacturing services (PCBA & Box-build)

System assembly, sheet metal production, powder painting and welding

Total solutions for the development, material supply production and distribution of mechatronic products

Source: Nordea Markets and Company Data



see that the company has been successful in strategy execution. Recently, acquisitions have become a way for it to increase the stagnant top line. We believe the recent move with PartnerTech will not be the last. The next acquisition may come in the large but still fragmented German market in the EMS sector, we believe.

Scanfil also aims to find new customers on an organic basis, though, especially in the Nordic countries and Central Europe. According to its official strategy, the company wants to develop its operations in co-operation with customers, based on customers’ needs. So small prototype manufacturing services for small startups might eventually grow to industrial-scale companies.

Scanfil also aims to stand out from its competitors by offering excellent performance. In practical terms, this means quality, flexibility and speed, which, together with price, are among Scanfil’s strengths, we argue.

According to the strategy, Scanfil also wants to be customers’ trusted partner for manufacturing services. We believe this means it will do what the customer is asking for. All EMS companies try to offer vertically integrated services for OEM companies but we do not classify Scanfil as the most vertically integrated in the sector. Vertical integration should increase operating profit margins but the biggest vertically integrated companies actually have very low profitability.

Customer base Scanfil has customers from a wide range of industries and pursues customers in new market segments that offer growth potential. Scanfil’s main customer segments are:

• Energy and Automation

• Networks and Communication

• Medtech, Life Science, Environmental Measurements

• Urban Applications

• Other industries.

Its clients are large, international companies in automation, energy, IT, health service and urbanisation. Scanfil’s largest customer represents approximately 13% of turnover and the ten largest customers account for 61% of turnover. This is an increase from 2016, when the largest customer represented 11% of turnover, and the ten largest 56% of turnover. The turnover distribution between the different customer segments is as shown in the chart below.

SCANFIL’S CUSTOMER BREAKDOWN


Energy and Automation In the Energy and Automation segment Scanfil offers electricity production and distribution systems, process control systems, energy-efficiency systems, such as

Energy and Automation

16%

Networks and Communication

19%

Medtech, Life Science,

Environmental Measurements

16%

Urban Applications33%

Other Industries16%



frequency converters, inverters, switches and automation systems. These customers focus mainly on energy efficiency, producing renewable energy, urbanisation and the general increase in industrial automation to improve productivity. Customers include Vacon (Danfoss), ABB, The Switch (Yaskawa) and Metso.

Networks and Communications Networks and Communications customers focus on digitisation, increasing the significance of telecommunications in society, wireless solutions and the Internet of Things. For these customers, Scanfil offers broadband, communications and mobile network equipment and systems. The products sold include base stations, exchanges and amplifiers. Customers in this segment include Nokia, Ericsson, Airbus, Teleste and Axis.

Medtech, Life Science and Environmental Measurements Customers in this segment focus on population ageing, healthcare needs in emerging markets, the monitoring of food, water and air quality, and the need to predict weather phenomena. Scanfil offers research, equipment associated with medical technology, and climate and environmental monitoring. The products sold in this segment include dental chairs, analysers, mass spectrometers and cloud height indicators, to name a few. Customers include Thermo Fisher Scientific, Planmeca, Vaisala and Getinge.

ELEVATOR CONTROL

Source: Company image

DIAGNOSTIC DEVICES


NETWORK STATIONS


ENERGY & AUTOMATION


Urban Applications These customers are interested in urbanisation (particularly in developing countries), an increase in the size of the middle class (particularly in Asia) and the growth of the ageing population. Scanfil offers products and solutions related to urbanisation, such as lifts, escalators, slot- and vending machines. Examples of Scanfil’s customers in this industry are Kone, RAY, Photo-Me (KIS) and Tomra.

Financials After several stagnant years Scanfil’s turnover has increased since 2014. Its operating profit was growing until 2014 before it started to decline. The decline stemmed from the PartnerTech acquisition in 2015 and the significant transformation and integration work done subsequently. Because of the transformation, Scanfil’s cost structure is now significantly lighter, and we do not expect the declining operating profit to continue.



TURNOVER


OPERATING PROFIT


Scanfil’s EPS bottomed out in 2012 and has been on a positive trend since then. However, integration and restructuring of the PartnerTech kept EPS improvement at bay in 2016. The company’s market cap has rose from EUR 50m up to EUR 270m in last five years, which is a remarkable achievement.

EARNINGS PER SHARE AND P/E


SCANFIL’S MARKET CAPITALISATION, EURm


Executive management Scanfil has quite an extensive management team, consisting of eight members, and a board of directors with five members.

Petteri Jokitalo has been the CEO since April 2013. He previously worked as Director of Sales and Marketing in Scanfil EMS Oy and as Managing director at Meka Pro Oy.

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EXECUTIVE MANAGEMENT

Harri Takanen is the chairman of the board and has been on the board since 2013. He has served at Scanfil Group since 1994. Before joining the board, he was the CEO of Sievi Capital plc, of Scanfil plc and of Scanfil EMS.

Our overall impression is that Scanfil possesses the relevant experience in its executive management and board of directors needed to drive its development.

Petteri Jokitalo Kai Valo Riku Hynninen Timo SonninenPosition Position Position PositionCEO CFO COO Vice President, Sales

Previous background Previous background Previous background Previous backgroundDirector of Sales and Marketing in Scanfil EMS OY , Managing Director in Meka Pro Oy

CFO for Norpe Group, Director of Finance and Control at Lite-On Mobile Group

Worked at Nokia Corporate since 1995, in charge of developing the production technology for mobile network business, creating new product delivery capability and product portfolio lifecycle management

Vice President for Operations in Efore Oyj, several Director positions at Incap Oyj

Education Education Education EducationMaster's Degree in Engineering Master's Degree in Economics MSc (Eng.). Bachelor's Degree in Engineering

No. of shares No. of shares No. of shares No. of shares202,000 0 0 73,000

Kristoffer Asklöv Tomi Takanen Markku Kosunen Mats LundinPosition Position Position PositionVice President, Operations Vice President, Operations Vice President, Operations Vice President, Supply Chain

Previous background Previous background Previous background Previous backgroundManaging Director at PartnerTech's factory in Åtvidaberg, several manager positions at PartnerTech

Director of Materials and Logistics at Scanfil and previously similar position at Sievi Capital Group, Managing Director of Scanfil (Hangzhou9)

Director of Operations at Scanfil and previously similar position at Sievi Capital Group. Vice President of Business Development in Mecanova Oy

Vice President Supply Chain at Partnertech AB, various managerial positions in purchasing and supply chain at Ericsson and Volvo

Education Education Education EducationMSc degree in Mechanical Engineering

Bachelor's Degree in Industrial Management

Technology undergraduate Master's degree in Industrial Economics and Engineering

No. of shares No. of shares No. of shares No. of shares3,000 50,113 27,861 0

Source: Nordea Markets and Company data



BOARD OF DIRECTORS

Shareholders The three main shareholders are Harri Takanen, Jarkko Takanen and Varikot Oy, who own 15.3%, 13.3% and 11.9% of the outstanding shares respectively. Harri Takanen is the chairman of the board and Jarkko Takanen is a board member. The founder of the company, Jorma Takanen, is the fourth-largest shareholder, with 9.5% ownership. We believe that having the founder and three of the four largest shareholders as board members is a positive sign. The main owners will surely want to ensure the company does not turn loss making.

The ten largest shareholders control more than 70% of the votes and the capital.

A strong ownership group may also be seen as a negative signal for the rights of the minority owners. In spring 2016, Scanfil arranged a direct share issue (9.9% from total shares) in one day with a 15% discount on the previous close price for selected investors. According to the company, there were weighty financial reasons to deviate from the pre-emptive subscription rights.

Harri Takanen Jarkko Takanen Benkt Engström Christen Härkönen Christina LindstedtPosition Position Position Position PositionChairman Board member Board member Board member Board member

Other appointments Other appointments Other appointments Other appointments Other appointmentsChairman: Titanium Rahastoyhtiö Oy, Board member: Finelcomp Oy, iLOQ Oy, Jussi Capital Oy, Visualligent Oy

Chairman: Indoor Group Oy, Board member: Sievi Capital Oy

Chairman: Food Village Stockholm Ab, Board member: Chamber Group Sweden Ab, Bure Equity AB, ScandiNova AB, Prevas AB, Advania AB and Avaj International Holding AB.

Board member: Arnon Oy, Koto Automation Oy

Board member: Qlean Air Scandinavia AB and Minalyze AB

Previous background Previous background Previous background Previous background Previous backgroundCEO of Sievi Capital plc for 4 years, CEO of Scanfil plc and Scanfil EMS in 15 months. Served Scanfil Group since 1994

Managing Director of Jussi Capital Oyj. Worked for Sievi Capital Group for 9 years

Has held a number of executive position as several companies in Sweden and globally. Examples are Whirlpool, Bofors AB, Duni AB and Fujitsu

Managing Director of DimWei Group Oy. Several director and executive positions since 1996

Managing Director at XploreBiz AB and Partner of Stockholm Business Angels. Has held several executive positions in Sweden and globally at AB Electrolux, Sony Ericsson and Sony

Education Education Education Education EducationMaster's degree in Engineering

Bachelor’s Degree in Production and Engineer and a Commercial College Diploma in Management Accountancy

Mechanical Engineer's degree

Master's degree in Engineering

Master's degree of business administration and commercial law

No. of shares No. of shares No. of shares No. of shares No. of shares9,776,664 8,511,169 10,829 0 6,000Source: Nordea Markets and Company data



BIGGEST SHAREHOLDERS AS OF 31 JANUARY 2018


Shareholder Share (%) Shareholder Share (%)Takanen Harri Tapio 15.30 Takanen Riitta Orvokki 1.65Takanen Jarkko Tapani 13.32 Varma Mutual Pension Insurance Company 0.91Varikot Oy 11.90 Sijoitusrahasto Taaleritehdas Mikro Markka 0.78Takanen Jorma 9.51 Veikko Laine Oy 0.78Tolonen Jonna Maria 5.25 Takanen Sanna Johanna 0.68Pöllä Reijo 5.21 Takanen Juha Petteri 0.65Laakkonen Mikko Kalervo 3.96 Sijoitusrahasto Aktia nordic micro cap 0.63Takanen Martti Tapio 3.05 Säästöpankki Pienyhtiöt 0.59Riitta Ja Jorma J. Takasen Säätiö 2.97 Evli Bank Plc 0.56Sijoitusrahasto Aktia Capital 2.39 Others 18.22Ilmarinen Mutual Pension Insurance Company 1.69 Sum 100.00



Market overview: The subcontractor sector There will always be a need for electronic components and we do not expect to see any remarkable paradigm shift in the EMS industry. This market is worth about USD 300bn and annual growth of some 6% is expected by IDC ahead. The main market growth drivers we see include digitalisation, increased product innovation and outsourcing ratios. The biggest players are on the consumer electronics side but Scanfil operates in industrial solutions, where size and high volumes are not as important. Typically, EMS companies do not have IPR for the products they produce, making the sector vulnerable to margin pressure. The best companies therefore need to have proactive management and tight cost discipline. In our view, Scanfil has the right strengths to survive amid the fierce competition in the sector.

Not all companies make their own devices In the electronic device market, an original equipment manufacturer (OEM) designs, makes and sells its devices. Scanfil is not an OEM company because it does not design its own products and does not own the intellectual property rights for the components it produces. It is an electronics manufacturing service (EMS) provider because it offers services for ODMs within manufacturing but also in design, supply chain management, configure-to-order and outbound logistics.

Not all OEMs have the best skills to manufacture their own devices, leaving this field for EMS providers such as Scanfil

The EMS industry exists because not all OEM companies want to, or have the best competence to, manufacture the devices they design and sell. One well-known OEM example is Apple. Apple may have superior design capabilities but subcontractors (EMS) are more knowledgeable about the manufacturing processes, which can improve product quality and reduce the price point to some extent.

Usually, OEM companies make fewer products but for a longer time and at a higher speed than EMS companies. Without their own products, EMS companies need more flexibility in their production lines, often making them run slower. An EMS company also has more ramp-ups, taking the total utilisation ratio slightly lower than for an OEM company on average. In addition, EMS companies make different products for multiple customers, resulting in the need for a much broader and more global supply chain.

THE RELATIONSHIP OF THE OEM AND EMS COMPANIES

Source: Flextronics

The EMS market is now more fragmented than it was after the IT downturn

After the IT downturn, the EMS market was relatively concentrated among the global players. In 2005, the six biggest EMS companies (Foxconn, Flex, Sanmina, Solectron, Celestica and Jabil) accounted for two-thirds of the entire market. Today, the market is more fragmented, with in excess of 2,000 companies offering EMS services. Smaller EMS contractors are well suited to high-mix and low-volume production. For example, tailoring and low volume series have provided a decent niche for Scanfil for decades.



The demand for electronic manufacturing tends to fluctuate with the ups and downs of the economy

The IT downturn also initiated migration to low-cost countries

The demand for electronic manufacturing tends to fluctuate with the ups and downs of the economy. A weakness of the consumer electronics industry is that much of it is built on the production of non-essential goods, so a severe downturn in the economy can have a crippling effect. The volatility is a little less in industrial solutions than on the consumer electronics side.

IT boom and financial crisis visible in the EMS sector The EMS market was relatively small in 1994-99 and concentrated to computers and consumer electronics. However, in 2000, the EMS market was boosted by the telecom and IT industries. EMS market growth was above 50% y/y in 2000. After that, the EMS market actually declined and reached a trough in 2002 along with the IT downturn. 2004 was a good year and offered some 20% market growth.

EMS MARKET AND FORECASTS 1994-2019E

Source: IDC

The years following the financial crisis of 2008 were challenging for the contract manufacturing industry. Some companies went out of business, while others had to downsize and restructure their operations to survive. The financial crisis opened up the contract manufacturing industry to private equity companies. The industry had low valuations, attractive long-term prospects and interest rates were at record lows.

During the IT downturn, Scanfil was not the biggest EMS company but it was responsive to market movements and quickly adapted its operations to the new environment.

The IT downturn also initiated migration to low-cost countries, and production sites were moved from Europe to China and Mexico. China offered 90% lower labour costs some 15 years ago, and this was one of the key elements in reducing costs in the EMS industry. Product quality in Mexico and in China was not always the same as in Germany but it was still good enough for several OEM companies. Scanfil also followed suit and expanded its production into China.

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EMS MARKET GROWTH FORECAST

Source: IDC

Product lifecycles are shortening, with less need for very durable components, making low-cost production more attractive

Furthermore, product lifecycles were becoming shorter and it made no sense to produce very durable components either. In the end, low-cost countries posed problems such as poor intellectual property rights. Another rising problem in China was wage inflation, effectively lowering the cost differences from Western production sites.

The total device market size is almost USD 500bn Current original equipment manufacturers (OEMs) are increasingly moving production, design and development processes to electronic manufacturing service (EMS) companies.

In the past, a bigger technology company typically made at least a part of its products in its own factories. Today, new technology companies design products without their own production facilities, or even the intention to build up their own plants. This operational model will integrate OEMs and the EMS market further.

COMBINED EMS AND ODM MARKET SIZE, USDbn

Source: IDC

An EMS company cannot reach the OEM market without vertical integration

An EMS company cannot reach the OEM market without vertical integration. Indeed, vertical integration has been the key to success in the EMS industry. For example, Hon Hai (Foxconn) started as a plastic parts maker but with vertical integration the company now makes entire devices and is one of the leading subcontractors globally. Hon Hai has been serving almost exclusively as Apple's EMS provider in the production of iPhones and iPads. So, the outsourcing percentage in the case of Apple is about 100%.

Scanfil does not have the resources to offer full integration in consumer electronics but we argue that this is not needed. It targets smaller industrial customers who do not have the immediate requirements of a global presence or high volume output.

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Source: Reed Electronics Research

Nokia expects a third consecutive year of decline for the mobile telecom market in 2018

Network station market growth has been negative in 2016-17 According to Nokia, the mobile telecom networks market will decrease for a third consecutive year in 2018. The problem is that demand for 4G and older 2G and 3G network equipment is subsiding, while demand for next-generation 5G networks remains a few years away. In more detail, Nokia estimated the global market would drop by 4-5% this year. This is one of the reasons why we do not believe Scanfil can reach overall EMS market growth in the near future. Scanfil makes telecom network station components for Nokia.

The medium-term growth potential for Scanfil comes from the 5G market. The 5G infrastructure market is estimated by Research and Markets information agency to be valued at USD 2.9bn in 2020 and expected to reach USD 33.7bn by 2026, at a CAGR of 50.9% for 2020-26.

MOBILE NETWORK STATION MARKET GROWTH IN UNITS


Not all subcontractor manufacturers are similar We identify several core strengths in the subcontracting business, but the companies operating in the sector usually have only one or two core strengths to differentiate them from competitors. According to our analysis, no company is the supreme leader in all core strength categories we identify. Below, we look at each of these strengths in the context of Scanfil’s business operations.

Quality is one of the most important core strength metrics All companies offering subcontracting manufacturing services claim to be leading quality providers. The differences in quality can be tracked by looking at internal processes and the company’s cost structure. Moreover, not all of their customers even

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want the best quality for all of their products because of what it means for end-customer segmentation and the required price point.

When making a longer product series or a totally new product, problems in quality can be very costly. They can not only cause delays and extra work, but also ruin a brand’s intangible value. This is why subcontractors usually put considerable effort into quality assurance. Detailed process control plans, documentation, training, integrated failure detection and industry-recognised quality certifications are some of the ways to assure brand owners of production quality. Scanfil has long experience in quality control and certificates and has no severe incidents on its record.

Scanfil’s smaller size gives some elasticity and provides a competitive edge versus the global players

Price is always strength Some subcontractors make devices with a cheaper price than competitors. A lower price does not always mean lower quality. A subcontractor can have a very suitable production unit with cheap workforce, cheap energy and cheap transportation costs. Local raw material prices can also make a large difference to production costs. Subcontractors have increased the level of automation to reduce costs and improve stable quality as well. We believe Scanfil is able to offer products at a relatively cheap price. In some cases, the company can take contracts for a price that bigger, international players are unable to match. This also means that a smaller size gives some elasticity and a competitive edge versus the global players.

The core strength of Scanfil is its customer base

Industry know-how A subcontractor needs to prove its competence, which usually requires a deep knowledge of the respective industry. Scanfil is a relatively old company, with decades of experience, and its industrial knowledge in telecom, energy, medical and urban applications makes it appealing to customers. Its flagship customers are Nokia, Kone, Metso, Danfoss, Planmeca and Vaisala. We believe one of its core strengths is its customer base.

Post-manufacturing logistics Global device manufacturers need to operate economically, which is why part of the production is usually outsourced to different countries and continents. Component manufacturing and assembly is usually conducted separately. There is also a need for warehouses located around the world to supply and distribute enough devices for all geographical areas at reliable speeds.

Several subcontractors offer post-manufacturing services for customers, but this usually requires a global footprint and a larger scale. Scanfil is still a small company and can only offer post-manufacturing logistics in limited areas. For example, iPhone main chassis assembly is carried out by Hon Hai (Foxconn) and Pegatron in China and we do not expect Scanfil to win such contracts.

Tailor-made devices and small product runs The biggest subcontractors are not able to make smaller product runs economically. The flexibility to tailor product runs differs between subcontractors.

We believe Scanfil is very flexible in its production needs and can make smaller product runs without sacrificing margins or utilisation ratios. Subcontracting is a volume business where economies of scale work well, which is why large global players have tried to achieve long product runs.

Time to market The goal with time to market is to have a new product (or a better quality product) out on the market more quickly than anyone else. Being the first on the market can have many benefits, such as increasing a company’s brand value and market share.

In the electronics sector, brand owners usually want their products on the market quickly and EMS companies able to deliver this speed will have a competitive edge. Faster time to market is a critical business objective for all manufacturers and they are using speed as a competitive weapon. However, we do not believe time to market



is one of Scanfil’s core strengths. There are many EMS companies with a faster response time in the sector, we argue.

In the electronics sector, EMS providers are key in accelerating the overall time to market. Having a competent EMS provider ensures effective and efficient development of the right projects at the right time, allowing fast and successful introduction of new products to the market. More predictable schedules are important as well as they can help the company to use its resources more efficiently.

However, speed is more important in the consumer electronics space and Scanfil operates mainly in the industrial solution sector, an area where time is not as crucial.



Competition A subcontractor business model faces fierce competition in all regions and in all customer segments. The needed technologies and production lines in the plants are almost a commodity and available for all EMS companies. The sector is in a mature phase, hence easy wins, even in EMS subsectors, are not readily available. Relatively low capital intensity in the EMS sector keeps the barriers of entry low and new, bigger customer contracts are usually hard to gain through organic growth. This also implies that customers are quite sticky, thus sector consolidation is partly driven by the distribution of customer accounts. Judging by the current customer base, we would even argue that competition is not the biggest threat to the company. In our view, the biggest threat to Scanfil is actually customers’ own strength in the global market, rather than losing a customer to another EMS provider.

The biggest competitors focus mainly on the consumer electronics markets

Scanfil’s market share in Europe is 1.9% For Scanfil, keeping its current big customers is an absolute must, as well as gradually finding small customers with future growth option. We argue that Scanfil has done good work in this arena. Thanks to its strengths (price, speed, flexibility and quality), Scanfil has proven to be a survivor in the competitive EMS industry and we do not expect the company to lose its strengths easily.

The main product segments in the EMS market are consumer electronics, communications, computers, automotive, industrials, medical and aerospace. The biggest global competitors focus mainly on the consumer electronics markets and include companies like Hon Hai, Sanmina, Benchmark, Jabil and Flex. Nordic competitors, which mainly operate in the industrials sector, include Note, Kitron, OrbitOne and GPV electronics. In Central Europe, the main competitors are Zollner, Exceet, TQ, Lacroix, BMK, Enics, and Neways.

During 2012-14, big competitors gained market share in the EMS sector but medium-sized EMS companies have grown more than big or small competitors in recent years (2015-17). Scanfil has posted record-high 20% compound average growth since 2012, mainly via acquisition.

EMS SECTOR COMPOUND ANNUAL REVENUE GROWTH RATE COMPARISON BY COMPANY 2012-18E


Scanfil’s market share from the global EMS industry is only 0.18% because the entire sector is fragmented. In Europe, there are almost one hundred competitors, and there are several hundred on a global basis. European EMS market size is some EUR 29.5bn indicating 1.9% market share for Scanfil.

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Long term customer contracts do not automatically mean a better profitability

Despite the fierce competition, customers tend to be very sticky in the sector. This creates an interesting situation – if the production of electronic components works well and has a reasonable price, customers have no reasons to change subcontractors. Nonetheless, the potential for customer turnover is very high in the sector, as all customers are price sensitive and well aware of the pricing environment. This means that price competition is tough, but the pressure comes directly from the customers instead of peers. Long-term customer relations therefore do not translate to better profitability for a subcontracting company.

PEER GROUP REVENUE GROWTH COMPARISON


Economies of scale work well in the electronic device manufacturing business

Mid-sized companies are the most profitable Economies of scale work well in the electronic device manufacturing business. According to our analysis, however, size does not increase operating profit margins after a certain level. For example, the five biggest companies in the sector have the same profitability as the smallest companies.

The most profitable peers are actually mid-sized companies with slightly more revenue that Scanfil. The biggest companies do tend to have very efficient platforms and efficient balance sheets, however, thus their returns on equity and returns on invested capital are better than the competitors.

SIZE AND PROFITABILITY REGRESSION ANALYSIS


The bargaining power in the value chain is usually weak

As seen from the picture above, operating profit margins tend to be low in the EMS industry compared with several other sectors, eg engineering consulting. This is due to the fact that subcontractors do not have IPR and their bargaining power in the value chain is usually weak. We do not expect to see a clear change in sector profitability going forward.

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Big companies are not very flexible and therefore struggle with low-volume and high-mix production, therefore Scanfil likely faces the most competition from similarly sized companies. Global players might rush to the mid-size market only if they face severe problems with current customers and low utilisation ratios became a problem.

The strategy of the biggest EMS company (Hon Hai) focuses on consumer electronics, especially smartphones and computers, but the company also makes precision machinery. The Taiwan-based company has over one million workers. The second biggest EMS provider is Flextronics, which is a private company. Flex has ~200,000 employees and the company is also active in the industrial sector, just like Scanfil.

Sanmina operates in the medical, energy, communication and defence sectors, as well as in the automotive industry. The company is present in 23 countries and has 45,000 workers. Benchmark operates largely in the same sectors as Sanmina, but makes more embedded systems, robotics and optical solutions.

Plexus is a more direct competitor to Scanfil because it can handle low-volume, high-mix products. Plexus has 15,000 workers and operates in the healthcare, industrial and communications segments, like Scanfil. Industrial customers are ~30% of its revenue, communication is about 20% and healthcare is 35% of total revenues. Scanfil has been active in Sweden with new products launches and prototype services for its customers, which is also the strategy for Plexus in its core markets.

SERVICES AND OFFERING IN THE EMS SECTOR


Universal Scientific Industrial (USI) produces network devices, servers, point-of-sale devices and handheld devices. It has 60,000 workers. USI offers direct R&D services for new devices, which brings the company close to an ODM business model. Siix has 11,000 workers and mostly makes household electronic devices and automotive equipment in Asia. The company has not been very active in Europe.

Like many other competitors, Venture offers printed circuit board assembly. The company operates in the communications and industrial segments much like Scanfil, but also makes components for printers and data storage devices. Venture has 12,000 employees. Interestingly, Venture has the same annual EBIT per worker as Scanfil.

Neways Electronics has fewer employees than Scanfil. Industrial customers make up 36% of the company’s business, while the medical segment accounts for 14% of revenues. The company’s service offering is similar to Scanfil’s and includes material management, after-sales services, development, design and new product launches.

Fabrinet operates in the medical, industrial, aerospace, automotive and industrial sectors. The company’s core service is circuit board assembly. Fabrinet specialises in

Hon Hai Celestica Benchmark Sanmina

Computers Design and Engineering Embedded systems Printed circuit boards

Communication After-Market Services Robotics Design & Engineering

Customer electronics Manufacturing Services Microelectronics Manufacturing

Automation devices Supply chain services RF & Wireless Supply chain management

Precise machinery Joint Design Manufacturing Optical Test systems development

Connectors Precision machining Precision machining

Automation devices Logistics and Fulf illment Cables

Plexus Venture USI Siix

Manufacturing Printed circuit board assembly Communication & Netw orks Industrial equipments

Design & Development Manufacturing services Storage & Server Automotive

New product introduction Mechanical systems design Point of sale Devices Information equipment

Supply chain solutions Electronics systems design Smart Handheld Devices Household electrical

Aftermarket services Product test development Car regulator Communication

Low -mid volume products Reliability engineering and testing Car rectif ier Machinery



Hanza Orbit One

Kitron Hapro

Note Norautron

GPV Electronics BB Electronics

Hon Hai Foxconn

Sanmina Jabil

Benchmark Plexus

Siix Celectica

Valuetronics Pegatron

Benchmark Fabrinet

optical and laser solutions, which differentiate its offering slightly from other EMS companies.

NORDIC COMPETITORS


OTHER EUROPEAN COMPETITORS


OTHER GLOBAL COMPETITORS


TOP 50 EMS COMPANIES IN EUROPE

Source: GPV Electronics

We believe Kitron’s technical capability is relatively high

Norwegian company Kitron has 1,400 workers and is especially active in the defence sector. Kitron makes components for weapon control systems and military communication devices. Its other sectors include marine & offshore, energy and medical. In the telecom sector, Kitron makes radio frequency systems. We believe the company’s technical capability is relatively high. Some of the company’s customers are Kongsberg, Saab and ABB. Kitron has the same 7% EBIT margin target for 2020 that Scanfil has, but the company even guides for 7.2% average revenue growth for 2018-20. Interestingly, Päivi Marttila is now a board member in Kitron. Before Kitron Päivi Marttila was on Scanfil’s board for several years.

Hanza is a Nordic EMS company. The main customer sectors are communications, industrial and defence. Hanza has 1,500 workers and some of its customers are Atlas Copco, Ericsson, ABB, Saab and Siemens. On top of PCB assembly, Hanza makes cable harnesses and sheet & heavy mechanics.

Scanfil has ~3,300 workers and it receives 20% of its revenue from the communications sector (Nokia, Ericsson), 16% from energy (Danfoss, ABB), 33% from urban applications (Kone) and 16% from the medical segment (Thermo Fisher Scientific). The company’s offering includes product design and development, production, prototypes, mechanics, material management, packing and delivery to customers.

In-house production should be seen as a direct competitor for all EMS companies

Big competitors do have better returns on invested capital Western Europe is a very fragmented EMS market with many small- and medium-sized companies. An electronic manufacturing unit is easy to construct, hence customers can directly ask a subcontractor to build a plant close to their own facilities. Production scalability is also good because new lines can be added relatively quickly and with low investment costs.

Zollner New ays

Exceet Lacroix

Enics CCS

Connect Videoton

Fideltronik AWS

BMK Group Prettl



This also means that customers usually have the alternative to make their own devices by setting up their own production units. In-house production therefore should be seen as a direct competitor for all EMS companies.

Medium-sized competitors post 11% ROI and 13% ROE figures on average according to our analysis. Scanfil belongs in this group in terms of size. The smallest companies’ balance sheets are not as efficient, hence value creation for the equity holder is not always a certainty. The biggest competitors have outstanding tools to optimise returns on invested capital and the average ROI is between 15-20% for these companies.

MEDIAN ROE % AND ROI % FIGURES IN EMS SECTOR


Competition is not even the biggest threat for the company Scanfil does not disclose its utilisation ratios but its production capacity is tailored to the customers’ needs, therefore we forecast utilisation ratios as relatively high, ie above 80%. In the EMS sector, however, utilisation ratios are not as easy to calculate as in the processing industry.

Revenue and EBIT from design and engineering services per worker are good benchmarks for all companies. Even the manufacturing of printed circuit boards needs a workforce; hence EBIT per worker can be used as a metrics to for EMS companies.

In the chart below, we can see that Scanfil has relatively good value creation per worker despite the company’s very competitive pricing. Kitron has roughly the same annual operating profit per worker as Scanfil. Most of the competition has an EBIT per worker in a range of EUR 6-8,000. One of the biggest companies (Hon Hai) operates with low profitability. We believe one of the reasons for the low profitability of Hon Hai is its customer base, which includes Apple, Cisco, HP, Microsoft, Huawei and Sony. These global majors might be hard counterparties in negotiations.

VALUE CREATION PER WORKER


Big company Medium Size Small companyRevenue > EUR 2500m EUR 500-2500m < EUR 500m

Median ROE% 12.8 11.2 5.2

Median ROI% 18.2 13.4 6.6

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We conclude that competition is not the biggest threat to the company

We believe that Scanfil is very competitive on pricing. To be competitive on price and still have high profitability and value added per worker means that Scanfil is one of the industry’s leaders due to best practises and process optimisation. We believe that the company will keep these strengths, thus global and even regional competition is not the biggest problem for the company. In our view, the biggest threat to Scanfil is when its customers lose their competitive edge – Scanfil only fares well if its customers are performing well in their own segments.



Historical financials There are six larger events in Scanfil’s history that are clearly visible in the company’s operating performance: its merger with Wecan, the IT downturn, the financial crisis, Nokia-Siemens restructuring 2011, the spin-off of Sievi Capital, and the acquisition of PartnerTech. The decline in the revenue between 2005 and 2012 came from the telecom sector. Even though the subcontractor sector is a low-margin business with high demand volatility and weak negotiation power, Scanfil has always been profitable, which we consider a remarkable achievement. Furthermore, the company has always paid dividends.

Acquisition took revenue to the next level Scanfil posted gradually declining revenue between 2005 and 2012. Even in 2014, net sales were lower than seen in 2001. However, the PartnerTech acquisition in 2015 took annual revenue up to EUR 500m, even after the divestment of the metal precision unit.

Sweden’s PartnerTech was a subcontractor with decent production sites but it continuously posted zero profitability. Scanfil saw a possibility to restructure the operations and adapt PartnerTech’s core strengths in the subcontracting industry. We consider the deal successful and 2017 is already good proof of that.

SCANFIL’S REVENUE AND REVENUE GROWTH


Revenue per worker was relatively stable during 2006-14. Average annual revenue per worker was some EUR 110,000 and subsequently increased to EUR 140,000 per worker. With the help of successful customer and product portfolio management, however, Scanfil was able to increase income per worker to EUR 160,000 in 2017. We do not expect a similar growth trend in 2018-19 but a small improvement is very likely, we argue.

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ANNUAL REVENUE PER WORKER


Organic revenue growth has been below the sector growth

Looking at organic revenue growth, we can see that Scanfil has not been able to achieve the same growth as the global EMS industry. Its customers have grown but have not increased the proportion of their outsourced business materially. A stagnant top line and zero growth may have been the reason why Scanfil acquired PartnerTech, we believe. Annual revenue growth has come back and should be 4-5%, we forecast.

REVENUE GROWTH COMPARED TO EMS MARKET GROWTH

Source: IDC, company data and Nordea Markets

Value creation has been increasing After the financial crisis, annual operating profit per worker declined for three years. Over the longer term, we can see that Scanfil has been able to increase average EBIT per worker from EUR 7,000 to more than EUR 8,000. The current figure, reported for 2017, is close to the best previous level, at EUR 10,000.

The electronic subcontractor business is still more or less manual work, even though it is carried out on automated lines. Robots have been doing the component assembly for the circuit boards but many other activities in the plants still require manual work. We do not expect to see fully automated plants or factories in the near future because the high investment requirements would jeopardise the return on invested capital.

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ANNUAL OPERATING PROFIT PER WORKER


After the merger, the combined Wecan-Scanfil operations were able to post a 10% operating profit margin but these good years are long gone. The whole business model in the subcontractor business is vulnerable to price erosion and margin pressure. Competition will likely keep earnings improvement possibilities modest in the future too.

In 2012-14 Scanfil was able to increase profitability but the PartnerTech acquisition took the EBIT margin down to 4%. Last year, it was again close to 6%, meaning management has performed well when integrating PartnerTech into Scanfil.

SCANFIL’S OPERATING PROFIT AND MARGIN


Scanfil reported record-high clean EPS for 2017

Scanfil reported record-high clean EPS for 2017. We believe the recent improvements in the top line and EPS has been somewhat unnoticed and the company’s market capitalisation might even be lagging its current good performance. However, 2017 net results included EUR 2.9m in positive one-offs, which we exclude from clean EPS.

A notable thing is that clean EPS has always been positive. The company is proactive with input costs and we expect it to remain so. This also means company-related risks are even lower than in the subcontractor sector on average, we argue. One of the key reasons for its strict cost management is its active main owner, we argue.

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The electronic manufacturing subcontractor business model is not capital-intensive

Investment requirements have been modest A production facility is essentially a simple entity. Automated assembly lines are relatively cheap and do not require annual maintenance investments. Scanfil has typically spent EUR 5m on investments, or some 2% of revenue, we calculate. The electronic manufacturing subcontractor business model is not capital-intensive.

Scanfil’s two largest investments relate to the acquisitions. The biggest one was in 2015 in Sweden with the SEK 443m acquisition of PartnerTech. In 2003, Scanfil acquired CPS Electronics from Metso. Wecan in 2002 did not require cash; the owners of Wecan received some 18% of the business from Scanfil after the merger.

SCANFIL’S ANNUAL INVESTMENTS


Liquidity was not a problem for Scanfil after the IT downturn. In fact, it even had too strong of a balance sheet, with EUR 40m in net cash. The balance sheet and the yields for invested capital were corrected when Scanfil was split into the holding company and the EMS operations in 2012. The increase in net debt in 2015 was related to the recent acquisition.

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NET DEBT DEVELOPMENT


The Eurozone crisis created uncertainty among Scanfil’s customers in 2011. These years were maybe the worst in the company’s history in terms of profitability and future expectations. The weak outlook and bad subcontractor market sentiment led Scanfil to lower dividend payments from EUR 0.12 to EUR 0.04 per share.

In more detail, Nokia Siemens networks announced it would cut 17,000 jobs and launch a EUR 1bn cost-savings programme in 2011. This also affected the product portfolio and inventory levels and led to a decrease in the demand for subcomponents for telecommunications products. Scanfil even issued guidance for 2012 stating that turnover and operating profit would decrease clearly y/y because of the poor demand for EMS telecom services.

The company has not fully recovered from the dividend drop. For next year, we forecast a better dividend than in 2007-10, though.

DIVIDEND PER SHARE


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Detailed estimates We make our revenue forecasts primarily by looking at the number of new customers, revenue growth among older customers, customer outsourcing ratios and EMS market growth expectations. Our main focus is on the current customer base, which practically defines Scanfil’s revenue growth prospects regardless of EMS industry growth. Scanfil’s profit and loss statement is straightforward: the main cost items are raw materials (70%) and personnel (16%). The company buys raw materials and components only for an actual customer order, which means that inventory or a potential time lag do not pose a threat to profitability, in our view. Personnel costs have risen from 12% to 16% of revenue and will most likely stay there. Operational leverage is somewhat limited, which is why we only forecast a small improvement in the operating profit margin, in line with expected 4-5% revenue growth.

A key to success is orders from the main customers Scanfil’s success is highly dependent on its customers. Any disturbance in the customer product portfolio or in the customers’ end demand is visible in Scanfil’s growth and earnings potential. We believe that the biggest customers are already in a mature phase, so we do not expect the outsourcing ratio to grow greatly for the biggest customers. This is why it makes sense to look at the customers’ revenue growth possibilities when making detailed growth estimates for Scanfil.

In the next graph we look at the median revenue growth for 14 listed customers. In our opinion, Scanfil’s sales growth guidance of 4.2% is well in line with the average growth of its customers’ revenues. This also means that the company does not expect to gain meaningful market share from its current customers.

MEDIAN REVENUE GROWTH FOR THE SCANFIL CUSTOMER BASE


Our revenue growth forecast is 5.3% for 2018 The company’s target is to reach EUR 600m revenue in 2020, which indicates 4.2% average annual revenue growth. The target is organic and does not include further acquisitions. However, Scanfil may buy a suitable company if the price and the terms are right. We also believe that it has its eyes open for potential targets in Central Europe, but it might be too early to expect activity on the M&A front this year.

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REVENUE GROWTH ESTIMATE


Scanfil’s revenue growth guidance for this year is in a wide range of 0-7.5%, but we believe that Scanfil will try internally to reach more than 5% growth this year. This also means that flat growth might then be a disappointment to the markets and for the company.

We expect Scanfil to buy PCB plates from Aspocomp

We estimate that raw material costs represent ~70% of revenue An electronic subcontractor company buys the required components for a manufacturing process. The main customer (ODM) does not usually buy raw materials, even though it could have the necessary size and purchasing power. Scanfil buys raw materials when there is a firm order from a customer to use the required components. This also means that there should be no risk of inventory leftovers or non-current inventory value changes.

Scanfil does not buy primary raw materials; in other words, it buys subcomponents to assemble PCBs. The main raw materials for printed circuit boards are woven fibreglass, phenolic paper, aluminium, copper, microchips, sensors, connectors and other electronic components. We expect Scanfil to buy PCB plates from Aspocomp.

RAW MATERIAL COST ESTIMATE, EURm


The price per tonne in raw materials varies considerably but we argue that a per-tonne measure is actually irrelevant for microchips and connectors. Nonetheless, steel is the most important raw material used by Scanfil, where one tonne costs EUR ~550.

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Personnel costs represent ~16% of revenue PCB assembly lines are not fully automated, which is why high-volume assembly requires a lot of workers. Its biggest competitor has 1.2 million workers versus Scanfil’s mere 3,300. In industrial PCB applications, size is not everything, though.

We forecast personnel costs of EUR 89m for 2018. In 2016, personnel costs were a bit higher but came down after the divestment of the mechanical metal unit in Sweden. Most likely, the ratio of personnel costs from sales will remain in a relatively narrow range. Scanfil has decades of experience in adjusting utilisation ratios when end-demand fluctuates, so we do not believe that personnel costs will present a problem. Even in the tough years of 2011-12 the company did not post losses, suggesting good cost discipline.

PERSONNEL COST ESTIMATE, EURm


Energy costs represent 2% of revenue Electricity and heat are needed in the production of printed circuit boards. However, the need for power is not extraordinarily high or at the same level as required by other converters or industrial producers.

We forecast energy costs of EUR 11m for 2018. Energy sources other than electricity are practically meaningless. We do not believe Scanfil hedges its electricity purchases because its plants are well distributed and volume per plant is relatively modest.

ENERGY COST ESTIMATE, EURm


The EBITDA trend was good in 2013-17 and we expect this to continue. Only a severe hiccup among its main customers could break this pattern. Scanfil’s largest customer accounted for 13% of turnover in 2017 and the top-ten customers for 61% of turnover.

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This means that one customer cannot ruin the company’s outlook to the same extent as in the past.

EBITDA FORECAST, EURm


Depreciation is 1.7% of sales For 2018 we forecast depreciations to be about EUR 8m and amortisations some EUR 2m, together close to EUR 10m. Investments have been the reason for the rising depreciation, in line with the company’s strategy. We do not believe Scanfil has overinvested in its operations, which could increase depreciation with a delay.

DEPRECIATION, EURm


Total depreciation amounted to about EUR 9m a year but the recent PartnerTech acquisition took it up to EUR 10m. Amortisation has been EUR ~4m per year since 2011, declining to EUR 2m recently. Intangible assets are now at EUR 25m, which is 18% of total equity. Consequently, a possible write-down after an impairment test would not put the equity or the ratios under heavy pressure.

A 7% EBIT margin is a realistic target, we believe The company’s financial target is to reach a 7% operating profit margin by 2020. We consider this realistic but not easily achieved, as we believe that any disturbance in the main customer accounts would immediately wipe out hopes of a 7% EBIT margin.

The EMS sector’s average EBIT margin has been ~5%. Scanfil has been able to post a 6.3% average margin in the past ten years, which is outstanding given the competitive price level. The healthy profitability also highlights Scanfil’s tight cost discipline and the importance of the proactive management team. Its active main owner has helped a lot too, we argue. Top management has always found it easier to

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make decisions when there is clear support from the board. Several subcontractor companies would have survived better if they had as visible a main owner as Scanfil.

OPERATING PROFIT ESTIMATE, EURm


Our forecast for the 2018 EBIT margin is 6.4%, while market consensus is at 6.5%. As market consensus and our estimate are both below Scanfil’s target, there might be room for positive surprises.

PartnerTech acquisition increased financial expenses Financial expenses have typically been about EUR 1.5m a year, while last year Scanfil reported net financials of EUR 1m, but with a EUR 2.4m positive one-off. This took the reported figure into positive territory. After the PartnerTech acquisition, net debt rose, which is why we forecast net financials of about EUR -1.4m going forward.

NET FINANCIAL EXPENSES, EURm


Tax rate has been a bit high The average tax rate over the past 17 years has been relatively high at 30%, as the company does not have old losses to be used for deductions. Most of its plants are not in low-cost countries either.

Last year its tax rate was lower than the historical average but the reported figure included a positive EUR 0.5m from Poland. We exclude this item from our clean EPS calculation.

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4%

5%

6%

7%

8%

9%

0

5

10

15

20

25

30

35

40

45

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

Mar

gin

EB

IT, E

UR

m


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

EU

Rm

Net financial expenses, EURm



We forecast a tax rate of about 22-23% going forward. The plant in the US will at least see some benefits from the local tax reform, we believe.

TAX EXPENSES, EURm


EPS growth can exceed 4% We forecast 4-6% EPS growth for the coming years, surpassing expected revenue growth. In the worst-case scenario, EPS could drop by EUR 0.15 if major customers reduce inventory and renew their product portfolio at the same time. This could temporarily take the P/E valuation up to 17x, which would not be a total catastrophe. In a very positive case the company may reach a 7% margin, which we calculate would take EPS up to EUR 0.51. Our EPS forecast for 2018 is EUR 0.42.

EARNINGS PER SHARE, EUR


We forecast EUR 17-20m in annual FCF Annual cash flow from operations has been some EUR 20m in the past but we expect this to improve. We expect to see more than EUR 30m in cash flow from business operations, from which investments would take a little over EUR 10m, leaving EUR 17-20m in annual free cash flow in 2018E-20E.

We expect annual dividend payments of EUR 7-9m, meaning that the company can use EUR 10m annually for debt reduction or additional growth investments.

0

1

2

3

4

5

6

7

8

9

10

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

EU

Rm

Tax expense, EURm

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

EU

R

Scanfil clean EPS, EUR



FREE CASH FLOW FORECAST, EURm


Investments account for close to 2% of revenue Scanfil added more space at the Sieradz and Atlanta plants in the US in 2017, which can be seen in the annual investments. Last year the company also added new lines to the plants at Suzhou and Malmö. The EMS sector is not very capital-intensive, so investments usually only account for 1-2% of revenue.

We expect investments to be EUR 14m going forward. The company has seen that revenue growth is required, and this might not come without investments. There might be some need to use money at the Myslowice plant in Poland to adjust lines for expected customer demand.

INVESTMENTS, EURm


Debt handling capability is good The balance sheet has always been strong but the recent PartnerTech acquisition temporarily took net debt up to EUR 65m. Last year net debt was only EUR 44m. Looking at the incoming cash flow, investment needs and dividend payments, we consider Scanfil’s debt handling capability to be good. Maybe the company should have taken a bit more leverage some years ago but Nokia Siemens’ related problems might have been the reason it kept risk levels very low after 2012.

-50

-40

-30

-20

-10

0

10

20

30

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

EU

Rm

FCF, EURm

0

10

20

30

40

50

60

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

EU

Rm

Investments, EURm



NET DEBT FORECAST, EURm


SCANFIL NET DEBT PER EBITDA


SCANFIL NET GEARING %


-20

-10

0

10

20

30

40

50

60

70

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

EU

Rm

Net Debt, EURm

-40%

-20%

0%

20%

40%

60%

80%

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

Net gearing

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

E

2019

E

2020

E

NetDebt/EBITDA (adj.)



Sustainability issues Scanfil’s annual reports are not very comprehensive in terms of the Global Reporting Initiative, Carbon Disclosure Project, Global eSustainability Initiative materiality analysis, or the UN Global Impact. However, the company did increase its focus on ESG issues in its 2017 annual report, which we recognise as a positive development. The most important ESG drivers for Scanfil relate to employee rights and its communication with labour unions. The company’s use of energy, released emissions and use of water are not a big part of its operations. It has been able to avoid ESG incidents in the past and we do not see greater ESG-related risks at the present time.

EMS is not an energy-intensive industry Manufacturing electronic devices does not require an extensive amount of energy and does not emit much carbon dioxide or other pollutants. Scanfil can therefore fulfil ordinary environmental sustainability criteria relatively easily. Globally, however, several subcontractors do face some ESG pressure on labour issues. Several global subcontractor companies have been under the radar, especially on employee rights.

Even though there is pressure to keep salaries low, incidents usually relate more to working conditions and disagreements with local labour unions, rather than salaries. Finnish companies tend to follow all the rules and regulation but incidents still occur. Two examples are PKC Group and Huhtamaki, which were said to have to restricted employees’ rights to join unions in their factories. Scanfil has been able to avoid such problems.

Low-cost model does not usually bring higher ESG rankings For many companies, ESG simply means putting a picture of green grass in the annual report. We look far beyond that in our sector and company analysis. Most products in the consumer electronics sector or in the electronics industry in general are price-driven, leading to low-cost manufacturing processes. Unfortunately, such a business model does not usually increase total value chain sustainability. Furthermore, not all consumer electronics are essential to our society, so natural resources are sometimes used for less necessary items.

For Scanfil, sustainability is of course looking after the environment, but also looking after people. Here, the company is doing a great job. We do not expect Scanfil to take broader responsibility for the sustainability of electronic devices globally, as this would require ethical commitment to avoid the unnecessary use of raw materials for products that are not very sustainable.

A short product lifecycle is one of the concerns A short product lifecycle is one of the main concerns in the electronics industry. Numerous devices are used for only a relatively short period of time, or even not at all. However, consumer electronics is not Scanfil’s main sector, so its products are not the most unsustainable, in our opinion. In the industrial sector, electronic devices (lifts, mobile network stations, etc) are used for quite a long time.

The recycling of devices would offer a better recovery rate for important raw materials. In the consumer electronics sector, end-users still hold the key role in how material recovery can be arranged. On the industrial side, the material recovery rate is a bit better. Scanfil cannot affect how end-products are recycled at the end of the product’s lifecycle, and this is true for practically all subcontractors in all sectors.

We argue that some consumer products should include sustainability labelling, which would let end-consumers decide what type of devices they are willing to use. This is already the case in many other sectors. However, in industrial applications sustainability labelling might not be as effective.

Scanfil has ISO standards for its operations but this does not solve the bigger problem on the primary raw material side. Currently, there are two ISO standards available:



ISO 14001 on Environmental Management System, and ISO 50001 on Energy Management. All of Scanfil's plants are certified ISO 14001-compliant.

Transparency is the key to a better ESG performance Electronics manufacturing service companies are responsible for much of the world's industrial and consumer electronics, which is why the use of energy and raw materials should be key sustainability criteria for the whole sector. The goal of Scanfil's environmental policy is to use raw materials and energy in the most cost-efficient manner and to minimise emissions, but the numeric targets are lacking and a detailed development is not reported. Scanfil has a programme to reduce energy consumption, utilise renewable sources of energy and select environmentally friendly products whenever possible. The company also wants to support sustainable development and follow ethical principles, which we believe is also true since customers such as Kone, Ericsson and Nokia have required it.

We believe the most important issue for Scanfil in terms of sustainability is transparency. If a company is fair and open, this does not usually lead to major problems. However, we do understand that some of the information related to sustainability issues is a competitive advantage and is thus confidential. One of the core strengths for Scanfil is that it has Nokia as a customer, which is a well-recognised sustainable business practices leader in global terms. The brand owner, such as Nokia, audits for quality assurance reasons, and recently also for environmental issues, human rights and labour violations. We also believe that Scanfil lets brand owners decide what ISO standards to follow and the depth of sustainability requirements that is needed in the manufacturing process.

Increased transparency reduces risk and allows a higher valuation of the company

We still believe that Scanfil should proactively report more about its operations in terms of ESG issues, though, going beyond what is required by regulation. Increased transparency reduces risk and allows a higher valuation of the company. Hopefully, adapting a tighter sustainability strategy does not restrict the customer base, but should actually improve new business opportunities and also further reduce risks.



Risk factors There are several major and minor risks related to the Scanfil investment case. We believe the biggest risk is the end-demand variation in the sectors in which Scanfil’s customers operate. For example, demand for 3G and 4G networks might end because operators are waiting for 5G networks to come in 2020. However, the customer base is now more evenly distributed than for it has been decades, reducing the telecom sector related risks. Furthermore, we do not see any material risks from the balance sheet, raw materials, first-pass yield and the competition. Scanfil has already proven to be very competitive and we do not expect the company to lose this ability in the near term. The balance sheet includes EUR 25m of intangibles but this represents only ~18% of equity.

Balance sheet includes EUR 25m of intangibles but this is only ~18% if equity

Financial position and capital needs Scanfil has never made annual losses, which somewhat limits the risks related to financial estimates or input costs. Without losses, equity capital does not decline, nor do multiples become a problem.

The balance sheet includes gross interest-bearing debt of EUR 61m, which is a higher amount than in past decades. However, the company’s debt-handling capability is good, and so interest-bearing debt should not be a material risk factor. Net gearing is only 33%.

Intangible assets only represent ~18% of equity, and so any possible weaker economic outlook or impairment test do not present material risks. A possible write-down of all intangibles would lead to an equity ratio of 39% and reported ROIC% would temporarily fall to 2%. We believe Scanfil would survive a write-down of intangibles without an equity issue.

Manufacturing risk Scanfil’s manufacturing process needs to produce quality products efficiently. The first-pass yield industry median for electronics manufacturing services is approximately 94%. Scanfil faces the risk that if this metric was to drop, it would diminish its margins and affect the overall profit.

General economy and specifically the Nordic region’s economy Scanfil is to some extent exposed to the general economy and that of Finland and Sweden in particular, which constituted 41 % of sales in 2017. However, we do not believe that a possible economic downturn in the region would lead to delayed orders from its customers because the end-markets for the components are global. So, Scanfil’s customers may be concentrated to Sweden and to Finland but they sell the products in all continents.

Acquisition strategy We believe Scanfil will continue to make acquisitions in the future. The company’s future sales and profit growth is therefore, to some extent, dependent on management’s ability to source and complete new deals. Furthermore, there is risk involved in integrating new businesses and the fact that Scanfil could potentially overpay.

Competition The company operates in a highly competitive industry. It faces intense competition from other EMS companies in all the segments in which it operates. Additionally, it also needs to take into account the competitive pressure coming from original equipment manufacturers. Scanfil’s competitive edge is its fast, flexible and reliable service with a global reach.



Customer concentration Scanfil has three key customers, which represent 30% of its sales. If Scanfil were to lose these customers, this could have a significant impact on its business. However, the rest of the customer base is distributed more evenly and across different segments and we therefore see no additional risk potential in the customer base.

Maybe the biggest threat to Scanfil is when its customers lose their own competitive edge – Scanfil only fares well if its customers are performing well in their own segments.

Currency exposure Scanfil is affected by currency risks – mainly transaction risks related to trade receivables and payables, translation risks related to foreign subsidiaries and financial risks related to exchange rate changes. Scanfil mitigates these risks using forward contracts and currency swaps. Its main exposures in terms of sales and costs are in EUR, USD, CNY and SEK.

Concentration of ownership The Takanen family and its closest partners holds shares representing over 50% of the voting power. As such, there could potentially be a governance issue putting the family’s interest ahead of those of the minority shareholders.



Peer group LARGER EMS PEER GROUP FINANCIALS


2016 2017 2018E 2019E 2016 2017 2018E 2019E 2016 2017 2018E 2019EHon Hai Precision Industry Co Ltd 127,810 132,276 133,496 138,280 -3% 8% 4% 4% 4% 3% 4% 4%Delta Electronics Inc 6,285 6,283 6,637 7,046 5% 4% 7% 7% 10% 9% 9% 10%Pegatron Corp 33,947 33,550 36,563 38,439 -5% 3% 9% 5% 3% 2% 2% 2%Venture Corporation Ltd 1,888 2,496 2,855 3,141 8% 39% 16% 10% 7% 10% 12% 12%IMI PLC 1,944 1,972 2,097 2,179 6% 6% 5% 4% 13% 14% 14% 15%Universal Scientif ic Industrial Shangha 3,286 3,806 4,427 4,901 -12% 24% 17% 11% 4% 5% 6% 6%Jabil Inc 16,451 16,009 17,070 17,559 3% 4% 11% 3% 3% 3% 4% 4%Vtech Holdings Ltd 1,632 1,953 1,879 1,910 -1% 12% 8% 5% 10% 9% 12% 12%Compal Electronics Inc 22,485 24,946 26,041 26,883 -10% 16% 7% 3% 2% 1% 1% 1%Foxconn Interconnect Technology Ltd 2,740 2,833 3,222 3,679 24% 18% 17% 14% 6% 8% 7% 8%Inventec Corp 12,564 13,139 13,562 13,813 8% 9% 5% 2% 2% 2% 2% 2%Micro-Star International Co Ltd 2,997 2,991 3,408 3,559 20% 4% 15% 4% 6% 5% 6% 6%Plexus Corp 2,274 2,140 2,283 2,460 -4% -1% 11% 8% 4% 5% 5% 5%Accton Technology Corp 861 1,024 1,165 1,326 19% 24% 15% 14% 8% 9% 10% 11%Sanmina Corp 5,767 5,815 5,514 5,691 2% 6% 0% 3% 3% 4% 3% 4%Gigabyte Technology Co Ltd 1,535 1,683 1,811 1,863 3% 14% 9% 3% 3% 4% 4% 4%Celestica Inc 5,723 5,094 5,003 5,135 7% 2% 1% 3% 4% 4% 3% 4%Benchmark Electronics Inc 2,198 2,056 2,066 2,162 -9% 7% 6% 5% 4% 4% 4% 5%SIIX Corp 1,732 1,725 1,972 2,143 -9% 10% 12% 9% 4% 4%Fabrinet 879 1,244 1,093 1,171 26% 45% -4% 7% 8% 10% 9% 9%Sercomm Corp 1,076 1,085 1,141 1,235 5% 5% 7% 8% 5% 4% 5% 5%TT electronics PLC 390 405 414 428 -35% 8% 1% 3% 5% 7% 7% 7%Alpha Netw orks Inc 640 536 540 565 -5% -13% -2% 5% 3% 4% 3% 4%Pc Partner Group Ltd 716 913 964 1,073 23% 47% 17% 11% 3% 5% 5% 5%Ducommun Inc 524 465 480 498 -17% 1% 5% 4% 5% 3% 4% 6%Valuetronics Holdings Ltd 221 275 305 343 -20% 16% 36% 12% 6% 7% 8% 8%Gemtek Technology Co Ltd 426 382 453 459 -17% -8% 21% -1% 2% 1% 2% 3%New ays Electronics International NV 393 439 450 473 5% 12% 7% 5% 3% 4% 4% 5%Sparton Corp 377 348 10% -5% 6% 2%Cicor Technologies Ltd 177 185 202 219 5% 14% 9% 8% 2% 5% 6% 7%Kitron ASA 231 248 273 295 7% 16% 11% 8% 6% 6% 6% 7%Lacroix SA 428 441 484 509 8% 3% 10% 5% 0% 3% 3% 3%Computime Group Ltd 399 445 11% 5% 4% 5%exceet Group SE 135 143 152 155 -1% 6% 5% 2% 1% 3% 6% 7%Key Tronic Corp 436 410 12% -4% 2% 2%IEC Electronics Corp 113 82 93 103 0% -24% 17% 11% 6% 2% 2% 6%Hanza AB 136 161 188 199 8% 17% 17% 6% 3% 3% 4% 5%SigmaTron International Inc 222 232 10% -1% 2% 1%Lite-On Japan Ltd 110 102 -25% 2% 1% 2%Di-Nikko Engineering Co Ltd 206 189 -21% 1% 1%

Group median 2.8% 6.0% 9.1% 5.0% 3.6% 3.9% 4.5% 5.2%Scanfil (Nordea) 508 530 558 579 34.6% 4.3% 5.3% 3.8% 4.4% 5.9% 6.4% 6.5%

diff.from median (pp) 31.9% -1.7% -3.8% -1.2% 0.8% 2.0% 2.0% 1.3%

Sales (EURm) Growth Ebit%



LARGER EMS PEER GROUP VALUATION


2016 2017 2018E 2019E 2016 2017 2018E 2019E 2016 2017 2018E 2019EHon Hai Precision Industry Co Ltd 9.9 12.0 10.1 9.4 5.0 9.4 6.4 5.9 1.4 1.3 1.2 1.2Delta Electronics Inc 22.3 20.4 16.4 14.7 12.9 11.8 9.7 9.1 2.6 2.6 2.4 2.3Pegatron Corp 10.4 12.8 9.7 8.4 3.4 5.3 4.0 3.6 1.2 1.2 1.2 1.1Venture Corporation Ltd 15.2 15.7 17.9 16.2 9.2 11.1 12.7 11.3 4.0 3.7 3.2 2.9IMI PLC 21.7 25.8 14.8 13.5 11.3 13.5 9.9 9.1 5.8 4.5 4.5 3.9Universal Scientif ic Industrial Shangha 28.9 26.1 17.0 14.4 13.8 16.5 10.3 9.1 3.6 3.1 2.7 2.4Jabil Inc 16.1 45.1 11.0 9.7 4.2 4.9 4.3 4.1 2.2 2.2 2.2 2.0Vtech Holdings Ltd 16.4 16.8 14.2 13.2 11.4 11.7 10.5 9.6 5.9 5.4 5.2 5.1Compal Electronics Inc 10.0 16.3 9.3 8.5 5.3 7.9 5.9 5.6 0.8 0.8 0.8 0.8Foxconn Interconnect Technology Ltd 24.1 11.9 9.3 0.0 9.9 4.8 4.3 1.5 1.3 1.2Inventec Corp 14.1 12.7 10.9 10.1 6.1 7.2 6.2 6.0 1.5 1.4 1.4 1.3Micro-Star International Co Ltd 12.8 13.2 13.2 12.3 8.3 8.9 9.6 8.7 3.1 3.1 2.8 2.6Plexus Corp 20.9 17.3 18.3 16.0 9.1 9.2 9.3 8.5 2.2 2.0 2.1 2.0Accton Technology Corp 15.1 23.3 15.6 12.8 7.2 15.1 10.4 8.4 6.0 5.2 4.7 4.3Sanmina Corp 11.9 20.9 12.7 10.0 6.3 7.9 6.4 5.1 1.3 1.2Gigabyte Technology Co Ltd 12.1 12.6 14.3 14.4 5.5 6.2 8.3 8.2 1.8 1.8 1.7 1.7Celestica Inc 12.5 14.2 9.0 8.0 5.1 4.7 4.0 3.7 1.2 1.1 1.0 0.9Benchmark Electronics Inc 23.7 22.0 17.3 15.4 7.3 6.7 1.1 1.1SIIX Corp 15.6 17.8 14.1 12.7 8.5 10.2 7.9 6.9 2.0 1.9 1.7 1.6Fabrinet 20.8 16.6 10.7 9.5 11.9 10.6 6.4 5.6 2.1 1.8 1.6 1.5Sercomm Corp 13.2 16.2 13.0 11.1 6.7 7.8 6.4 5.7 2.7 2.6 2.5 2.3TT electronics PLC 22.2 26.7 17.1 15.9 8.8 8.6 6.9 6.5 1.1Alpha Netw orks Inc 14.2 19.0 21.4 15.0 3.7 6.1 5.7 4.3 1.2 1.2 1.2 1.2Pc Partner Group Ltd 6.0 4.9 6.3 5.3 5.9 3.8 4.5 3.7 1.0 1.9 1.6 1.3Ducommun Inc 11.4 46.5 21.1 14.0 8.3 11.6 9.2 8.1 1.4 1.6 1.4 1.3Valuetronics Holdings Ltd 7.5 9.7 12.0 11.0 1.2 3.5 6.9 6.2 2.8 2.7 2.2 2.0Gemtek Technology Co Ltd 15.3 26.7 21.5 17.1 8.3 29.4 8.6 6.7 0.9 0.9 0.9 0.8New ays Electronics International NV 11.0 15.7 13.2 10.5 6.8 8.0 7.5 6.5 2.3 2.0 1.8 1.6Sparton Corp 13.6 163.8 11.1 13.2 0.0 0.0 1.4 2.6Cicor Technologies Ltd 313.7 26.4 18.1 12.8 8.1 10.1 8.2 6.6 1.3 2.5 2.2 1.9Kitron ASA 14.6 12.5 12.4 10.8 7.8 7.0 7.3 6.5 2.4 2.2 2.1 2.0Lacroix SA 109.0 8.8 13.7 11.2 14.6 4.7 6.3 5.5 1.3 1.4 1.3 1.2Computime Group Ltd 9.3 7.2 3.6 1.8 0.8 0.7exceet Group SE 25.4 15.4 12.7 3.0 7.4 5.4 4.8 1.0 1.0 0.9 0.8Key Tronic Corp 12.8 13.8 7.4 7.1 0.8 0.7IEC Electronics Corp 10.2 619.3 15.9 6.6 7.2 19.3 10.8 6.0 3.0 3.5Hanza AB 129.6 15.8 8.1 6.9 7.2 5.6 2.9 2.6 0.9 0.9 0.7 0.7SigmaTron International Inc 12.5 16.4 5.0 6.1 0.4 0.4Lite-On Japan Ltd 33.2 34.0 3.5 6.7 0.9 1.4Di-Nikko Engineering Co Ltd 10.9 9.9 10.4 15.1 0.5 0.6

Group median 14.2 16.7 13.9 11.8 7.4 7.9 6.9 6.1 1.4 1.8 1.7 1.6Scanfil (Nordea) 14.6 11.8 10.9 10.2 7.9 7.8 7.1 6.5 2.1 2.2 2.0 1.8

diff.from average 3% -29% -22% -13% 7% -1% 2% 6% 51% 23% 15% 12%

P/E EV/EBITDA P/B



Reported numbers and forecasts


INCOME STATEMENTEUR m 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020ENet revenue 197 219 211 181 189 215 377 508 530 558 579 601 Revenue grow th -9.9% 11.2% -3.9% -14.2% 4.2% 13.8% 75.9% 34.6% 4.3% 5.3% 3.8% 3.8% EBITDA 21 19 23 21 22 25 27 18 40 45 48 49 Depreciation and impairments PPE -5 -5 -9 -8 -7 -6 -8 -9 -7 -8 -8 -8 EBITA 16 14 14 12 15 19 19 9 33 38 40 42 Amortisation and impairments 0 0 -5 -4 -3 -2 -5 -2 -2 -2 -2 -2 EBIT 16 14 9 8 12 16 14 7 31 36 38 40 of w hich associates 0 0 -5 -4 -3 -2 -1 0 0 0 0 0 Associates excl. from EBIT 0 0 0 0 0 0 0 0 0 0 0 0 Net f inancials 5 1 -1 -1 -1 -0 -1 -1 1 -1 -1 -1 Pre-Tax Profit 21 15 8 8 11 16 14 6 33 35 37 39 Reported taxes -7 -4 -2 -2 -2 -4 -5 -6 -7 -8 -8 -9 Net profit from cont. operations 14 11 6 6 8 12 8 0 26 27 28 30 Discontinued operations 0 0 0 0 0 0 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 Net profit to equity 14 11 6 6 8 12 8 0 26 27 28 30EPS 0.25 0.19 0.11 0.10 0.14 0.21 0.15 0.00 0.40 0.42 0.44 0.47 DPS 0.12 0.12 0.06 0.04 0.05 0.07 0.08 0.09 0.11 0.14 0.15 0.15 of w hich ordinary 0.12 0.12 0.06 0.04 0.05 0.07 0.08 0.09 0.11 0.14 0.15 0.15 of w hich extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit margin in percent EBITDA 10.6% 8.8% 11.0% 11.4% 11.8% 11.6% 7.2% 3.6% 7.6% 8.2% 8.2% 8.2% EBITA 8.1% 6.6% 6.9% 6.8% 8.0% 8.7% 5.1% 1.8% 6.3% 6.8% 6.9% 6.9% EBIT 8.1% 6.6% 4.3% 4.5% 6.3% 7.6% 3.8% 1.4% 5.9% 6.4% 6.5% 6.6%

Adjusted earnings EBITDA (adj.) 21 19 23 20 23 25 33 33 40 45 48 49 EBITA (adj.) 16 14 14 12 15 19 25 24 33 38 40 42 EBIT (adj.) 16 14 9 8 12 16 20 22 31 36 38 40 EPS (adj.) 0.25 0.19 0.11 0.09 0.15 0.22 0.24 0.24 0.36 0.42 0.44 0.47

Adjusted profit margins in percent EBITDA (adj.) 10.6% 8.8% 11.0% 11.1% 12.0% 11.7% 8.7% 6.6% 7.6% 8.2% 8.2% 8.2% EBITA (adj.) 8.1% 6.6% 6.9% 6.6% 8.2% 8.8% 6.6% 4.8% 6.3% 6.8% 6.9% 6.9% EBIT (adj.) 8.1% 6.6% 4.3% 4.2% 6.4% 7.6% 5.3% 4.4% 5.9% 6.4% 6.5% 6.6%

Performance metrics CAGR last 5 years Net revenue -8.8% -7.4% -2.7% -4.2% -2.9% 1.7% 11.5% 19.2% 24.0% 24.2% 22.0% 9.8% EBITDA -12.4% -12.3% 3.3% -4.5% 1.1% 3.4% 7.0% -4.8% 14.2% 15.4% 13.9% 12.7% EBIT -11.6% -12.0% -4.3% -15.5% -10.9% 0.4% 0.0% -4.5% 31.0% 24.8% 18.5% 22.4% EPS -8.1% -12.6% -4.5% -16.5% -11.7% -2.8% -5.1% -57.9% 32.6% 23.9% 15.8% 26.4% DPS -7.8% 3.7% -9.7% -19.7% -16.1% -10.2% -7.8% 8.4% 22.4% 22.4% 15.9% 14.1%

Average EBIT margin 7.8% 7.4% 7.4% 6.7% 6.0% 5.9% 5.1% 3.9% 4.5% 4.8% 5.0% 5.5% Average EBITDA margin 10.4% 9.7% 10.3% 10.3% 10.7% 10.9% 10.1% 7.7% 7.3% 7.1% 7.0% 7.2%




BALANCE SHEETEUR m 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Intangible assets 4 6 6 6 6 11 29 27 25 23 21 19 of w hich R&D 0 0 0 0 0 0 0 0 0 0 0 0 of w hich other intangibles 1 4 4 4 4 5 18 16 15 13 10 8 of w hich goodw ill 2 2 2 2 2 6 11 11 10 10 10 10 Tangible assets 31 34 27 30 28 27 48 41 48 54 60 67 Shares associates 0 26 0 0 0 0 0 0 0 0 0 0 Interest bearing assets 0 0 0 0 0 0 0 0 0 0 0 0 Deferred tax assets 0 0 1 1 0 0 3 2 4 4 4 4 Other non-int. bearing assets 0 0 0 0 0 0 0 0 0 0 0 0 Other non-current assets 25 27 1 1 0 0 0 0 0 0 0 0 Total non-current assets 60 93 35 37 35 38 80 70 77 81 85 90 Inventory 25 37 31 30 29 36 91 85 101 105 109 113 Accounts receivable 43 54 28 32 33 41 105 88 106 111 115 119 Other current assets 16 8 21 16 0 0 2 4 2 3 3 3 Cash and bank 57 58 14 15 28 19 22 20 21 26 32 38 Total current assets 141 156 94 93 90 96 220 197 230 244 258 273 Assets held for sale 0 0 0 0 0 0 1 0 0 0 0 0Total assets 201 249 129 130 126 134 302 267 307 325 344 364

Shareholders equity 151 161 69 75 80 95 100 108 125 144 164 184 of w hich preferred stock 0 0 0 0 0 0 0 0 0 0 0 0 of w hich Equity of hyb. debt 0 0 0 0 0 0 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 0 0 0 Total Equity 151 161 69 75 80 95 100 108 125 144 164 184 Deferred tax 0 1 0 0 0 0 3 3 5 5 5 5 Long term int. bearing debt 2 36 27 19 9 1 50 38 27 25 22 20Non-current liabilities 0 0 0 0 0 0 0 0 0 0 0 0 Pension provisions 0 0 0 0 0 0 0 0 0 0 0 0 Other long-term provisions 5 4 0 0 0 0 1 0 0 0 0 0 Other long-term liabilities 0 1 0 0 0 0 0 0 0 0 0 0 Convertible debt 0 0 0 0 0 0 0 0 0 0 0 0 Shareholder debt 0 0 0 0 0 0 0 0 0 0 0 0 Hybrid debt 0 0 0 0 0 0 0 0 0 0 0 0 Total non-curr. liabilities 7 42 28 19 10 1 55 41 33 30 27 25 Short-term provisions 0 0 0 0 0 0 0 5 0 0 0 0 Accounts payable 31 42 23 26 26 30 108 90 113 117 121 126 Other current liabilities 0 0 0 0 0 0 0 0 0 0 0 0 Short term interest bearing debt 12 4 9 9 9 9 38 22 36 34 31 29 Total current liabilities 43 46 32 36 36 38 146 117 149 151 153 155 Liab.for assets held for sale 0 0 0 0 0 0 1 0 0 0 0 0Total liabilities and equity 201 249 129 130 126 134 302 267 307 325 344 364

Balance sheet and debt metrics Net debt -43 -18 22 13 -10 -10 66 40 43 33 22 10 Working capital 53 57 57 51 36 47 90 87 96 101 105 109 Invested capital 113 149 92 89 71 85 170 157 173 182 190 199 Capital employed 157 203 97 94 90 96 155 150 157 174 191 209 ROE 7.0% 5.5% 7.9% 10.6% 14.0% 8.6% 0.1% 22.2% 19.7% 18.3% 17.2% 16.2% ROIC 9.5% 7.7% 5.8% 6.7% 11.5% 16.0% 6.9% 0.6% 15.0% 15.5% 15.6% 15.7%

Net debt/EBITDA -2.1 -0.9 0.9 0.6 -0.4 -0.4 2.4 2.2 1.1 0.7 0.5 0.2Interest coverage 12.8 9.4 4.7 8.0 10.1 19.7 3.3 1.5 4.8 24.1 30.2 38.5Equity ratio 75.0% 64.5% 53.6% 57.7% 64.1% 70.6% 33.2% 40.6% 40.7% 44.4% 47.6% 50.7%Net gearing -28.6% -11.1% 31.5% 17.6% -12.2% -10.5% 65.4% 36.9% 34.4% 22.8% 13.3% 5.5%





CASH FLOW STATEMENTEUR m 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020EEBITDA (adj.) for associates 21 19 28 25 25 27 28 18 40 45 48 49 Paid taxes -5 -4 -3 -1 -3 -3 -4 -5 -8 -8 -8 -9 Net f inancials 0 0 -1 0 0 0 -2 -2 -2 -1 -1 -1 Change in Provisions -1 -1 -4 0 0 0 1 4 -5 0 0 0 Change in other LT non-IB -25 0 24 0 1 0 -2 1 -2 0 0 0 Cash f low to/from associates 0 0 0 0 0 0 0 0 0 0 0 0 Dividends paid to minorities 0 0 0 0 0 0 0 0 0 0 0 0 Other adj. to reconcile to cash f low 25 -2 -35 -12 -10 -7 -1 7 4 0 0 0Funds from operations (FFO) 15 12 10 12 14 16 21 23 27 36 38 40 Change in NWC 16 -12 18 0 -1 -5 -8 -6 -6 -5 -4 -4Cash flow from op. (CFO) 31 0 27 11 13 11 13 16 21 31 34 36 Capital Expenditure -3 -9 -4 -17 6 -8 -51 -4 -11 -14 -14 -15Free Cash Flow before A&D 28 -9 24 -6 19 3 -38 13 11 17 20 21 Proceeds from sale of assets 0 0 0 0 0 0 0 0 0 0 0 0 Acquisitions 0 0 0 0 0 0 0 0 0 0 0 0 Free cash f low 28 -9 24 -6 19 3 -38 13 11 17 20 21

Dividends paid -7 -7 0 0 -2 -3 -4 -5 -6 -7 -9 -9 Equity issues / buybacks 0 0 0 0 0 0 0 17 0 0 0 0 Net change in debt 0 28 -7 -9 -9 -10 44 -26 -4 -5 -5 -5 Other f inancing adjustments 0 0 0 0 0 0 0 0 0 0 0 0 Other non-cash adjustments -23 -10 -60 15 5 1 1 -1 -1 0 0 0 Change in cash -4 1 -44 1 13 -9 3 -2 0 5 6 7

Cash flow metrics Capex/D&A 61% 202% 27% 57% 38% 95% 424% 50% 213% 142% 146% 150% Capex/Sales 2% 5% 2% 4% 2% 4% 14% 1% 4% 2% 2% 2%

Key information Share price year end (current) 2.8 3.0 2.0 0.8 1.4 2.5 3.8 3.5 4.3 4.5 4.5 4.5 Market cap 159 171 113 47 78 142 220 222 271 287 287 287 Enterprise value 116 154 135 61 68 132 286 262 314 320 309 297 Diluted no. of shares, year-end (m) 58 58 58 58 58 58 58 64 64 64 64 64

VALUATION RATIOS - ADJUSTED EARNINGSEUR m 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E P/E (adj.) 11.2 15.8 18.0 9.1 9.1 11.4 15.7 14.6 11.8 10.9 10.2 9.7 EV/EBITDA (adj.) 5.5 7.9 5.8 3.0 3.0 5.3 8.7 7.9 7.8 7.1 6.5 6.0 EV/EBITA (adj.) 7.3 10.7 9.3 5.1 4.4 7.0 11.6 10.7 9.4 8.5 7.8 7.1 EV/EBIT (adj.) 7.3 10.7 14.8 8.0 5.6 8.1 14.3 11.7 10.0 8.9 8.2 7.5

Valuation ratios/reported earnings P/E 11.2 15.8 18.0 8.3 9.5 11.5 26.3 2441.8 10.5 10.9 10.2 9.7 EV/Sales 0.6 0.7 0.6 0.3 0.4 0.6 0.8 0.5 0.6 0.6 0.5 0.5 EV/EBITDA 5.5 7.9 5.8 2.9 3.1 5.3 10.5 14.4 7.8 7.1 6.5 6.0 EV/EBITA 7.3 10.7 9.3 4.9 4.5 7.1 14.9 28.0 9.4 8.5 7.8 7.1 EV/EBIT 7.3 10.7 14.8 7.5 5.8 8.2 19.8 36.2 10.0 8.9 8.2 7.5 Dividend yield (ord.) 4.4% 4.0% 3.1% 4.9% 3.7% 2.8% 2.1% 2.6% 2.6% 3.0% 3.2% 3.4% FCF yield 17.3% -5.5% 20.9% -12.1% 24.5% 2.1% -17.3% 5.8% 3.9% 5.9% 6.9% 7.3% Payout ratio 48.9% 63.7% 55.2% 44.4% 33.8% 32.3% 33.1% 37.7% 30.6% 33.0% 33.0% 33.0%


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