Translation: Original published in Finnish on 6/22/2025 at 10:45 pm EEST.

Incap's key strength, cost efficiency, has supported the company's excellent profitability in recent years, despite fluctuations in the market situation. We trust that the company will maintain its strengths in the future. There is greater uncertainty associated with creating growth in the short term due to the strained trade and geopolitical situation, while the longer-term outlook is better thanks to the clear growth of the electronics market and the M&A option. In our view, Incap's share is somewhat neutrally priced when viewed against the overall picture with a one-year horizon. Therefore, we reiterate our target price of EUR 12.00 for Incap and downgrade our recommendation to Reduce (was Accumulate) as the short-term upside of the share has narrowed. 

Incap is a high-performance contract manufacturer

Incap is an electronics industry contract manufacturer that primarily specializes in high mix / low volume applications. The company creates added value for its customers 1) by allowing more efficient resource allocation for OEMs to core business activities such as product development, sales and marketing, and 2) by bringing flexibility to OEMs through outsourced production both to capacity and cost management. Incap has built a decentralized organizational model, which in turn has led to a lean organization, low overhead costs, fast operational decision-making, and a cost-oriented culture. In addition, a significant share of the company's production is in low-cost countries (particularly India). We believe that these factors are the key strengths of the company. The main risks still include a single large customer (2024: 41% of the company's revenue), fluctuations inherent in investment-driven demand, and potentially intensifying competition.

Strong earnings growth may be delayed until the coming years

Incap's revenue grew rapidly at the beginning of the decade, but in 2023-2024, the inventory correction of the largest customer and the effects of rising interest rates have slowed down growth. In the short term, the impacts of the trade and geopolitical situation on customers' decisions continue to pressure the growth outlook. The electrification of the world and the resulting increase in electronics, as well as the rising outsourcing rates and shares of industrial equipment manufacturers, are, however, driving up the demand for contract manufacturers in the long run, in line with GDP growth or faster. In addition, Europe's need to increase defense investments may open up growth opportunities for contract manufacturers like Incap, which are capable of rapidly scaling up production. The fragmented structure of the industry, together with Incap's current very strong balance sheet position, forms a solid foundation for growth through acquisitions. In light of the company and industry background, we deem Incap's value creation opportunities good in acquisitions (including the successful AWS and Pennatronics acquisitions). In our baseline scenario, we expect Incap to return to double-digit growth at the latest next year, but due to a weak Q1, increasingly challenging comparables towards the end of the year, and the still unclear trade and geopolitical situation, there is a risk associated with the current year's upward-trending guidance, especially regarding earnings. We estimate profitability to remain exceptionally strong relative to the industry at approximately 13% adjusted EBIT margin, thanks to the aforementioned strengths, but value creation must primarily come through growth.

The valuation picture is already relatively neutral on a one-year horizon

Incap’s P/E ratios for 2025 and 2026 based on our estimates are 15x and 13x, while the corresponding EV/EBIT ratios are 9x and 8x. Absolute multiples are justifiably above historical levels, but they fall within our estimated neutral multiple range for the current year. The upside to the share's DCF value is also limited. Therefore, we view the share's risk/reward ratio as relatively neutral for the year, with a 12-month horizon. Upside risks for the share could include favorable acquisitions and stronger earnings development than our forecasts.