Disclaimer: This isn’t Funding recommendation. PLEASE DO YOUR OWN RESEARCH !!
Abstract:
In case you would ask me about probably the most boring inventory of my usually very boring portfolio, I might identify Schaffner Group. I had purchased a primary place again in 2021 throughout my “All Swiss Shares” collection.
Nonetheless, I’ve by no means written a extra detailed write-up despit my annual summaries (2021/2022 , 2022/2023), perhaps becasue I at all times acquired bored once I began writing about it ? Over time I added to the place and after the newest 6 months numbers, I made a decision to extend right into a full place. Time to clarify the funding case a bit bit higher.
- The Firm – Transformation
Schaffner Group is a Swiss firm that underwent a major tranformation over the previous few years. Most significantly, they managed to dispose their second largest division “Energy Magnetics” which was loss making in 2021 and deal with 2 divisions: EMI Filters and Automotive. That is how Schaffner describes their tranformation in a 2022 investor presentation:
For some causes, the final 2 years nonetheless have been “noisy”. In 2020/2021 (Monetary yr goes from 01.04 to 31.3.), they needed to ebook a (non money) loss for the ability magenitics disposal, in 2021/2022, the Automotive division suffered from the availability chain points within the vehicle business.
Nonetheless, beneath this noise, the core division, EMI filters grew steadily. Now, in FY 2022/2023, with a sure restoration of the Automotive section, the true high quality of the enterprise begins to emerge. However extra on this laters.
2. The enterprise & Merchandise
Schaffner has a pleasant graph in considered one of theri presentation how their merchandise appear to be:
These merchandise at first sight are clearly not “horny client” merchandise that you simply discover within the grocery store however slightly small, however essential components for different producers (B2B).
The primary product line of Schaffner are EMI Filters. You’ll find an in depth description of those Filters and why they’re wanted as an illustration right here. In a nutshell, {most electrical} equipement requires these filters as a way to stop electro magnetic interference (EMI) between totally different digital circuits. Though these parts are usually comparatively low worth gadgets, they normally should be customized made to instantly match the precise function and there are sometimes business norms that require using these filters.
It appears to be that it is a small however rising business with just a few gamers and Schaffner appears to have a worldwide market share of round 20-30%. So on this small pond, it’s a slightly massive fish.
Schaffner’s enterprise mannequin is to largely desgin the parts in Switzerland however manufacture them in China and Thailand, in order that they appear to be very competitve on worth.
What I discover most attention-grabbing is the very fact, that there’s structural progress on this business because the elevated electrification means structurally larger calls for for his or her parts. EV charging, semi-conductor manufacturing and heatpumps are just a few areas that Schaffner mentios that presently drive progress and can so for the foreseeable future.
3. How have issues progressed ?
Since I’ve purchased the primary shares, the Industrial division has grown steadily, however as talked about, the Automotive division had some issues. Within the curren monetary yr nevertheless issues look good and Schaffner, which communicates usually fairly undertsated acquired virtually euphoric:
Schaffner had intitially guided mid time period goal of an EBIT-Margin of 10-12% and an natural progress price of 5% p.a., each targets have been surpassed and so they appear to be fairly optimistic for the complete yr. That is supported by a really capital environment friendly bsuiness mannequin with reaching 33% ROCE within the first 6M:
4. Valuation
With 631‚069 excellent shares and a share worth of 285 mn CHF, the corporate is valued at ~180 mn CHF. Schaffner has round 8 mn in web money at 31.03 so this interprets, if we simply double 6M numbers. into an anticipated P/E of 9,2x and EV/EBIT of 8,0 for the present yr. Not dangerous for a double digit EBIT margin enterprise with a excessive ROCE and probability of respectable progress and a rock strong stability sheet. Particularly when considerung {that a} regular Siwss enterprise with this KPIs would simply commerce 50% or dearer.
5. Why is the inventory low cost ?
I believe there are just a few apparent causes, the primary being a really weak long run observe report which is mirrored in an extremly unispiring long run share worth:
Schaffner as we speak is buying and selling under its IPO worth of 1998 and has oscillated between 100 and 300 CHF for the final 15 years or so. So clearly, traders don’t appear to be satisfied but, that Schaffner might be on a long run success path.
As well as, the final 2 years have been noisy and just one analyst appears to cowl Schaffner. Liquidity is simply modest, it isn’t simple for a fund or bigger investor to get out and in shortly. Schaffner additionally experiences solely twice a yr and doesn’t present quarterly updates. Not everybody likes this, i do.
Schaffner additionally has some China publicity and appears to make use of round 300 individuals in China. The bigger manufacturing hub nevertheless appears to be Thailand with 1000 workers.
Final however not least, the enterprise mannequin at first sight is just not very horny and likewise not simple to grasp.
6. Administration, shareholder construction, different stuff
The biggest investor is a monetary investor referred to as BURU Holding who additionally owns a 20% stake in Kardex, one other prime quality Swiss producer. BURU Holing is run by Philipp Buhofer, a Swiss Investor who appears to play the lengthy recreation and appears to be fairly energetic. Marc Buhofer, clearly a relative, owns one other 3% of Schaffner.
CEO Aeschliman was appointed in 2017. He owns round 2100 shares which is a bit bit lower than his annual wage, however quantity is growing resulting from incentive applications. The incentives are based mostly on EBIT margins, free cashflow and particular person targets, General I might price the mixture of shareholder & Managment nearly as good.
As talked about above, stability sheet high quality is excessive, with 8 mn web money and no goodwill.
Capital allocation is comparatively clear: They pay out round 40-50% of the revenue in dividends and the remaining will go in direction of selective M&A.
Perhaps one comment with regard to a possible catalyst: I believe there may be none or solely a really small one. The one potential “tender catalyst” could possibly be a potetnial dividend enhance. In the event that they stick with their 40-50% pay out rule, 40% of a possible 20 mn web revenue in 2022/2023 could be round 12,50 CHF per share, a major enhance in comparison with the 9 CHF paid in for the earlier yr.
Abstract:
The general case for Schaffner could be summarized fairly simply: One can get firm with an excellent enterprise at a wonderful worth.
The mixture of a double digit EBIT margin (12%) , double digit natural progress, ROCE within the 20-30% and a valuation of ~9x 2023 P/,E for me is a good wager on the expectation, that the way forward for Schaffner appears to be like higher than the previous.
For me, Schaffner is likely one of the most attention-grabbing circumstances of a conventional enterprise that may doubtlessly profit from an extended progress pattern in direction of electrification. Sure, it’s a trunaround, however in contrast as an illustration to Meier & Tobler on the time of the funding, the flip round has already occurred and so they now “solely” have to proof that this was not a one-off.
Even when this journey is bumpy, I believe over the subsequent 3-4 years, the shares may provide a good return. On prime of an anticipated dividend yield of as much as 5% p.a. I may simply think about one other 10% pa. as a mix of progress and a slight a number of enlargement kind the present low ranges. In the very best case, this might even grow to be a “Meier & Tobler 2.0” if the inventory trades at “Swiss High quality multiples”.
I’ve due to this fact elevated the place additional to a 6% weight and financed this largely by way of an extra lower in Meier & tobler which is no longer so low cost anymore.
One ought to point out that the share is just not overly liquid, on common, 300-400 shares are traded each day on the Swiss alternate.