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Riding on the IoT wave

 

Steering towards a high-growth high-margin profile. Over the past five years, the company has strategically employed both organic as well as inorganic means to put itself on a high-growth high-margin trajectory. In 2016, it took a big step in the Internet of Things (IoT) space, with the acquisition of Kontron. Since then, it has made multiple bolt-on acquisitions to widen its technical know-how in this space as well as developed in-house research and development capabilities for higher-margin proprietary technologies. It also entered into a strategic partnership with Taiwan-based Foxconn, which gives it access to a broad range of IoT products and technologies, and access to Foxconn’s sales channels in Asia and North America. This complements its strong presence in Europe. IDC expects the IoT market to grow at a 11.3% CAGR over 2020- 2024; we believe S&T is well-positioned to benefit from this growth.

 

Set to achieve its 2023 growth goals. In 2019, S&T set goals for revenue growth at a 15.1% CAGR over 2018-2023 to EUR 2bn and EBITDA margin improvement of around 190bps to 11% in 2023. The company plans to achieve this growth through a mix of organic (~60% contribution) as well as value-accretive inorganic growth (~40%). However, its organic growth plans have been mildly impacted by COVID-19-led disruptions, but the company plans to cover up for it by seeking to potentially make more acquisitions. Valuations of target companies in the COVID-19 environment have fallen substantially to 0.3x-0.5x sales vs. the range earlier of 0.5x-0.75x. We note that S&T has a strong liquidity position to fund acquisitions.

 

Potential for margin expansion. S&T’s EBITDA margin should continue to inch up, led by favourable changes in its product mix, cost rationalization and realization of synergies from its acquisitions through cross-selling opportunities, product optimization and new developments as it collaborates with recently acquired companies on technical know-how.

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