Company description:
SFS, headquartered in Heerbrugg, Switzerland, is a leading global manufacturer of mission critical, engineered precision components and industrial fastening systems. Founded in 1928, the company can rely on its long-standing experience in cold forming, mechanical fastening, injection moulding, and deep drawing to deliver customer-specific solutions.
SFS operates across the globe in more than 100 locations, and is one of the few truly global players in the fastening industry serving a range of large OEMs . Its customers are not only located in the automotive, construction, electronics, and capital goods industries, but also in the field of medical technology and aerospace technology. The company is organised into 3 divisions: Engineered components, Fastening systems, and Distribution and logistics.
Up until now, the company’s growth has mainly been organic, but it recently acquired Unisteel which has opened up an enormous new market in the fast growing electronics industry and in particular the smartphone market.
Investment case:
This global manufacturer of engineered precision components and industrial fastening technology is set to enter the Swiss stock market in the first week of May. Based on various sets of valuation methods (e.g. DCF, peer group analyses, and regression analysis), the expected fair value ranges from CHF 2 billion to CHF 2.5 billion. This will allow the company to issue shares for a total value in the range of CHF 500 million to CHF 700 million. The current book value of a share is the region of CHF 42 to CHF 45. After the IPO, the two founding families will maintain a majority stake of over 55%, the staff will maintain about 10%, and the remaining 35% will be issued on a free-float basis to the market.
SFS possesses excellent engineering know-how and a very strong capability for innovation. Its cold forming technology used to produce high-precision engineered components and fasteners has an outstanding global reputation. The company also has great depth of expertise in design and tooling, which has been one of the keys to its success.
Because the use of SFS products shortens the application time, the costs for the end-consumer are reduced. For this reason, and others, SFS’s traditional business is relatively well ring-fenced; competitors face relatively high entry barriers in terms of technologic requirements. However, there are a few substitution risks to the company’s products including a) alternative fixing methods (adhesives), b) alternative products (polymers and composites), and c) other production technologies (sintering). SFS’s customer base is well diversified. Its direct competitors in the world market are companies such as Alcoa, Hilti, Bossard, Illinois Tool, Koch, Masterfix, The Würth Group, Nippon Industrial Fastener Co., etc.
Through the acquisition of Unisteel, SFS’s business has recently entered a new dimension. Not only did this acquisition open the doors for its existing products to the fast growing Asian market, but it also gave SFS access to the fast growing consumer electronics market. It’s likely that the IPO related money flow will be higher than the immediate cash-flow required to refinance the prior acquisition of Unisteel. Therefore, the remaining proceeds could be used to fund a further acquisition which could result in SFS possibly becoming the key supplier of miniscrews to the consumer electronics market. Key accounts could include such firms as Samsung, Asustek, in addition to Apple.
Profitability in 2013 was very good, the company increased its sales by 11.5% to around CHF 1.33 billion. The EBITDA margin climbed to round 20.3%. In the Swiss Market Industrials segment, only one other company had a higher EBITDA margin, Geberit. SFS’s other competitors, Bossard and Daetwyler, had an EBITDA margin of around 14%. Looking at income, SFS generated a profit of about CHF 128 million, which resulted in a net margin of 9.6% or 6.5% when the Unisteel figures are taken into account.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- SFS has a rock solid balance sheet; the company is well run and represents the perfect “Swiss Mittelklassen-Unternehmen”,
- SFS has achieved significant sales growth in the last few years (11.7% in 2012, 11.5% in 2013),
- SFS produces mission-critical and customer-specific products that allow it to perfectly differentiate itself from its key competitors,
- The growth opportunity in the miniscrew market is enormous. The acquisition of Unisteel is a milestone for SFS and its future development,
- The company has a sustainable dividend policy, the pay-out ratio is expected to be in region of 35 % to 50%,
- SFS’s well-diversified portfolio of industrial end markets reduces the risk of cyclicality at the group level,
- New EOM and key account wins could lead to further success in the aerospace and mobile markets.
Weaknesses:
- The group’s future growth potential depends more and more on general consumer-based products e.g. automobile and electronic devices,
- Increased acquisition activity could lead to integration issues,
- SFS is a relatively small company compared with its international competition; therefore it can’t easily maintain the same speed in R&D required to meet the ever shortening product cycles,
- SFS is very dependent on the European market,
- The Smartphone market is subject to rapid changes. In the future, parts will no longer be screwed, but rather merged together during the production process. With this development about 50% of Unisteel’s turnover could be at risk,
- HDD technology will eventually be replaced by SSD technology. Thus Unisteel could lose about 30% of its turnover,
- The company’s results are very sensitive to raw material prices.
Company profile, investment opportunity and asset management integration:
| Metric | Rating |
| Operational risks: | Above average |
| Expected growth: | Above average |
| Long term value creation: | Above average |
| Positive competitive advantage: | Above average |
| Management excellence: | Above average |
| Financial strength: | Average |
| Investment orientation: | Group “Best-in-Class”: Swiss Companies |
Price ranges:
| Buy: | Only forcustomers |
| Sell | Only forcustomers |
| Stop-loss: | Only forcustomers |
| Fair-value: | Only forcustomers |