Scanfil: Company expands in Asia-Pacific with acquisition

Translation: Original published in Finnish on 10/4/2024 at 7:09 am EEST.

Scanfil has acquired SRX, an electronics manufacturer based in Australia and Malaysia, for a purchase price of 23 MEUR. This is a minor acquisition for Scanfil, and it can be financed from the company's cash resources. On paper, we think SRX is a good fit for Scanfil. We also believe that the purchase price, which is in line with Scanfil's current year multiples, is reasonable, although the valuation is somewhat complicated by the additional purchase price, which is high relative to the purchase price and dependent on SRX's progress over the next two years. 

Company acquired an electronics manufacturer based in Australia and Malaysia

Scanfil announced yesterday that it has acquired SRX Global for a debt-free purchase price of 23.3 MEUR (25.7 MUSD). SRX has two factories in Melbourne, Australia and Johor Bahru, Malaysia. The factories have in total 8 automated SMT lines and ca. 300 employees. SRX focuses on complex, low-to-medium volume production and globally recognized customers. In the financial period ending June 2024, SRX achieved an EBIT of 2.7 MEUR (EBIT-% 7.0%) on revenue of 39 MEUR.

Scanfil will pay the debt-free purchase price in cash with its liquid assets (40 MEUR at the end of Q2). In addition, the seller is entitled to a total earnout of maximum 10.5 MEUR (11.6 MUSD). The earnout is separately evaluated based on SRX’s financial performance of 2024 and 2025. The impact of the transaction on Scanfil's net debt/ EBITDA ratio is minimal and the ratio after the transaction will remain well below the long-term target of less than 1.5x.

The transaction will have no impact on Scanfil's financial outlook for 2024. Scanfil will host an online presentation in English of the acquisition on October 4, 2024 at 2:00 pm EEST, which can be accessed here.

SRX seems to fit nicely as part of Scanfil on paper

In our view, the acquisition was not at all surprising, as growing the business and reducing customer risk through inorganic growth has been part of Scanfil's playbook for most of its history. Our interpretation is that the company also slightly increased the emphasis on inorganic growth at its Capital Markets Day in the spring (our comment on CMD here). Scanfil's balance sheet has strengthened significantly in recent quarters (cf. net debt/EBITDA 0.4x at the end of Q2), so we estimate that the company had roughly 150 MEUR debt capacity for acquisitions at the end of Q2. This means that Scanfil only used a fraction of its firepower to buy SRX. 

SRX, which operates in at least the healthcare sector and industrial electronics like Scanfil, seems to us to be a good fit for Scanfil on paper. Scanfil has not had any factories in Asia outside China or in Australia. Thus, the companies are unlikely to have any overlap and the geographic coverage of Scanfil's production machinery will also be enhanced by the transaction. SRX's profitability profile also seems to match Scanfil fairly well, although the financial history of SRX presented in the press release was short. We expect Scanfil to gain small purchasing synergies from the acquisition as volumes increase, but in our view the clearest value creation potential of the deal lies in the expansion of SRX, the offering of SRX's product range to Scanfil's existing global customers (and vice versa), and a slight reduction in the group's customer-specific risks.

Purchase price in line with Scanfil's current year multiples

The purchase price (EV) corresponds to an EV/S multiple of 0.6x and an EV/EBIT multiple of less than 9x calculated on SRX's actualized earnings. The multiples are exactly in line with those in our forecasts for Scanfil for the current year, which we consider moderate for Scanfil over the longer term. Therefore, we believe that the transaction price is initially reasonable from Scanfil's perspective, too. However, the additional purchase price is quite high in relation to the purchase price (45% of the purchase price), which makes it difficult to assess the valuation as the terms of the additional purchase price have not been disclosed. Nevertheless, as a starting point, we believe that in order to achieve the full earnout for the seller, SRX's growth will need to be robust in the coming years. SRX's profitability, on the other hand, may have less room for improvement due to a relatively good margin for the industry in the most recent financial year.

We are incorporating the SRX acquisition into our Scanfil forecasts and will update our view on the company on Monday.