The outlook for Elma Electronic is rosy. But for investors, it is difficult to see where the company is heading. An obvious point of reference would be the company’s results for the past business year, which were published at the start of March. The second half of fiscal 2022 was considerably better than the first, and the Wetzikon-based company entered the current financial year with a high order backlog. The increasing dynamism of business development in recent years has not been lost on the stock market either. Between the start of 2020 and mid-2022, the share price rose from CHF 440 to more than CHF 1,100. Since then it has fluctuated around a level just north of CHF 1,000.
Only a very few private investors have benefited from this comet-like trajectory, as the company has a low free float. But this is not the only blemish dampening enthusiasm for this evolving company. Due to considerable global uncertainties and low visibility, management chose not to issue any specific guidance for the current year when unveiling the annual financial statements for 2022.
„Elma Electronic has clear strategic targets“
„The company has not provided any guidance because we do not believe this would be meaningful,“ says Martin Wipfli, who has chaired Elma’s Board of Directors since 2008. He points out that anyone who talks to the company or follows its communications will be in no doubt that Elma Electronic has clear strategic targets that it pursues tenaciously. „Moreover, we also communicate about our perceived weaknesses and where we are putting in the most effort. Long-term investors appraise a company on the basis of its strategy rather than relying on annual guidance,“ adds Wipfli.
Martin Wipfli is the founder and Managing Partner of Baryon AG. He is also Chairman of the powerful industrial group Metall Zug. Also associated with Baryon is the listed holding company Nebag, which Wipfli likewise chairs. A lawyer by training, he sits on the board of directors of several listed and unlisted companies, as well as on the board of trustees of various charitable foundations and pension funds. In total he holds around 30 mandates – some of which involve other positions as chairman, including for Müller Martini, Newrox, and Fisba.
Modest free float
Wipfli effectively holds a quarter of Elma shares through Bayron. And because the free float accounts for barely 10% of the shares, Elma is one of the quieter companies on SIX Swiss Exchange (cf. major shareholders table). Trading volumes are modest, and on many trading days in the year no shares change hands at all. „Regular exchanges of views with major shareholders take place within the limits of what is legally possible. But in terms of content, these exchanges do not extend beyond what we communicate to the outside world,“ responds the Chairman to the question of how much the company interacts with its major shareholders.
Table: FuW stock guideOther companies in a similar position – i.e. with little in the way of a free float and no great attention from analysts and brokers – have chosen to go down the delisting road. Will Elma do likewise? Wipfli: „It’s not been considered an option to date. I have no doubt that the company will attract considerable investor interest after the transformation phase.“
Into Sulzer’s arms – and out again
It was back in 1961 that Josef Mayr founded Elma Electronic in Mönchaltdorf, a small town in the Zürcher Oberland. At that point the focus was on the manufacture of meters and switches. In less than ten years the company developed into one of the most important Swiss suppliers of electronic components. In 1965 the company expanded by setting up a subsidiary in Munich. By the end of the 1960s, the Mönchaltdorf site had become too small to house the workforce of 200 people, so in 1970 the company relocated to new headquarters in Wetzikon (the group now has a workforce of around 820 employees). In 1974 Elma Electronic was wholly acquired by the industrial group Sulzer, which had already taken a stake in the company four years earlier. Elma expanded into the US by establishing a local subsidiary in 1985, before then setting up a second subsidiary in this market a few years later.
Sulzer took the decision to spin Elma Electronic off in 1996, as it no longer seemed a good fit with the group structure, and contributed only CHF 65 million – or around 1% – to group revenues. By this time, Elma had evolved into a specialist in electronic packaging: Specifically, the company packaged electronic assemblies into housings for clients such as Olivetti and Ascom in order to protect these sensitive components from dirt, radiation, and overheating. In the year 2000 Elma then founded subsidiaries in France, the UK, and Israel, as well as taking over companies in Germany and Romania. The expansion continued in 2004 with the founding of a subsidiary in China and the takeover of companies in both the US and the UK.
Sales rise, profitability declines
„The strong and high-quality order book reflects the trust of clients“, writes the company in its 2022 annual report. But the company has not succeeded in breaking free of the familiar pattern of development in the past – higher sales and a swelling order book on the one hand, but declining profits on the other.
Last year sales increased by 3.6% to CHF 154.7 million. In currency-adjusted terms this increase works out at 3%. The order intake exhibited even stronger growth of 4.7% to CHF 167.8 million – with the second half of the year in particular having seen a strong rise in new client orders. Elma is keen to point out that the second semester of the year was much better than the first on the profitability front. Nonetheless, operating profit (EBIT) for the 2022 financial year almost halved to CHF 4.6 million, while net profit declined by more than 40% to CHF 4.2 million.
As the key criteria for a positive dividend decision – namely an improved balance sheet structure, a reduction in net debt, and an equity ratio of more than 50% – were met, a distribution of CHF 2.00 was paid out for 2022, as it had been the previous year. The company paid no dividend between 2008 and 2021.
Global supplier to electronics manufacturers
One reason for the scant attention paid to Elma is its product spectrum, which the average consumer will never set eyes on. The industrial supplier provides its clients with elements of their IT infrastructures, including backplanes with sockets for electrical systems, rotary switches, components, and housings – but also complete platforms for computer systems. These components are often elements of units that are incorporated into large systems.
Products and services are offered in three strategic product lines by ten Elma national subsidiaries, based in the three regions of the Americas, Europe and Asia. As the IT supplier has production sites in all three regions, it can rapidly respond to client needs. As a consequence of this global setup, the company has also been affected by recent geopolitical uncertainties and the resulting supply bottlenecks.
According to the 2022 Annual Report, the Americas region largely made good the loss suffered in the first half of the year by optimizing its production processes and strengthening key personnel. However, sales suffered from both the tight US labour market and material procurement difficulties. Development was positive in Europe overall thanks to robust system solutions, although the subsidiary in Germany was directly affected by the sanctions imposed on Russia by the EU. On the positive side, a „significant“ system contract in the area of autonomous driving was awarded by an automotive company.
Pandemic drags down performance of Asia in 2022
When viewed by region, the company made ground in 2022 not just in Europe, the source of around a half of all orders, but also in the Americas. By contrast, orders from Asia lagged well behind those of the previous year due to the challenging pandemic situation, above all in the first semester. As the company was not able to fully pass on higher input costs, the margin at the level of operating profit before taxes (EBIT) declined from 6.1% to 3%.
„Elma Electronic is transforming itself from a homemade SME into a process-oriented industrial company“
Chairman Wipfli is very clear: „I focus on long-term objectives and the long-term development of the company. From my perspective, the perception of the public or the financial markets is not the key consideration.“ As he sees it, what matters is how clients and employees view the company. He also points out that Elma has invested massively in knowledge in recent years, and is now taking on a new dimension as a company. „Elma Electronic is transforming itself from a homemade SME into a process-oriented industrial company,“ he asserts.
Only „at the beginning“ on the sustainability front
The company has firmly stepped up its efforts on the sustainability front. At the start of 2022, Elma signed up to the Science Based Targets initiative (SBTi), undertaking to promptly draw up measures to reduce emissions across the company in keeping with the findings of climate science. Some 4,000 companies worldwide have now undertaken this commitment. „We are only at the beginning, and still have a long road ahead of us. We will be investing significant sums in our buildings and production facilities in the near future, being mindful to reduce our carbon footprint despite our planned growth,“ reveals the Chairman.
When it comes to the reduction of greenhouse gas emissions, Elma is above all looking at Scope 3 emissions – indirect emissions from business activity, including the emissions relating to purchased goods, its own products made from commodities such as aluminium and steel, as well as all along the value creation chain. Here the company is focusing on the procurement process, recycling, the extension of product life cycles, and alternative solutions.
In order to make its commitment to the environment and the common good more visible, Elma has been supporting SolarButterfly since 2022. This project is an enlightenment campaign for a sustainable lifestyle, involving a vehicle traveling around the world with its power supplied by solar energy. In 2022, this vehicle covered more than 15,000 miles as it travelled through 27 European countries. Its journey has continued in North America in 2023, with the ultimate aim of visiting more than 90 countries worldwide. The vehicle consists of an electric car and a 10-meter-long trailer, which spreads its wings at the press of a button to commence the solar charging process, transforming itself into a butterfly (hence its name). As well as powering the vehicle, the solar cells – which stretch over an area measuring 120 m² – supply energy to a living compartment for up to six people.
Summary
In a comparison with Elma’s key figures, the development of the share price is quite eye-catching. Over the last five years, earnings per share have recorded an average annual rise of 6.7%. The value of the stock has recorded on average annual rise of 19% over the same period. However, this has not been an even development, and is overwhelmingly attributable to the stunning share price rise in 2021 and 2022. This shows that the market has gained confidence in the company’s strategy and is looking optimistically to the future.
Share price of Elma Electronic in CHF. Chart: six-group.com
The confidence of investors can hardly be explained by the company’s key figures for the last two financial years. Cash flow from operating activities, operating profit (EBIT), and earnings per share have lagged well behind the equivalent figures reported for 2019 and 2020.
And with a price/earnings ratio of around 55x, much of the expected future success of the company is already priced into Elma stock. Following the „price explosion“ of recent years and in the absence of any forecasts from the company itself, investing in Elma with a short-term mindset would appear rather risky from today’s standpoint. Nor are payouts to shareholders an obvious buy argument, with the dividend yield currently standing at just 0.2%. Even more saliently, the company’s dividend track record reveals little continuity.
In its 2022 Annual Report, the company stated the following: „With a clear focus on profitable, innovative, and complex projects, we were able to win various strategically relevant orders with an improved risk and margin profile in 2022.“ In 2023, this can be expected to translate into not just rising revenues, but also an improvement in profitability. From a long-term perspective, Elma Electronic looks to be on a promising path. But the investment community has recognized this too in recent years, and has driven the price up to giddy heights.
