Semcon Spins Off Its PI Unit To Increase Shareholder Value

/ November 28, 2021/ M&A (large, with revenues above $50m), Semcon, Sweden, Technical documentation

Semcon To Spin Off Product Information (PI)

Semcon will spin off its Product Information (PI) unit and plans to list it on NASDAQ Nordic. Product Information is one of Semcon’s two business units, along with Engineering and Digital Services (EDS). It had in 2020 revenues of SEK 579m (~USD 64m) and an EBIT margin of ~15.4%. The unit has a background in technical documentation. Over time, it expanded to information from products to installation and MRO technicians/engineers and spare parts. 

In the past years, the business unit has moved its delivery to Budapest, Hungary (225 FTEs), to counterbalance price pressure, servicing mostly Swedish clients. Nevertheless, PI still has employees onshore, including 325 in Sweden, 115 in the UK, and 75 in Germany. The business unit has a graphics center in the UK. It also has 60 FTEs in China.

PI also moved to adjacent offerings such as online training/e-learning. The company strengthened its business with the 2020 acquisition of Sweden-headquartered Xtractor. Xtractor primarily provides e-learning contents services. It, however, has an LMS IP, which the company offers either as standalone, for a subscription fee, or part of multi-year contracts. Xtractor brought SEK 50m (USD 6m) in revenues. The acquisition complemented Semcon’s CMS IP. We are not fully clear how Xtractor and its training content fit PI’s after-market services.  

PI continues to refresh its core after-market services, with recent offerings around AR/VR-based training.

Semcon Now Profitable

Semcon officially believes the spin-off will provide more operational freedom to both PI and the remaining Semcon. It certainly brings shareholder value. The company was upbeat about how the two different firms would have more flexibility to conduct their operations. However, we are not convinced. We are not clear how a listed PI, with USD 64m in revenues, will be better positioned to fund growth and cover SGAs than as part of the larger Semcon. Also, expect Semcon to suffer from commercial dis-synergies as PI and EDS have many clients in common. 

Having said that, Semcon’s shareholders have been very patient and probably need to recoup their investment. Semcon has gone through a long-lasting reinvention. The company has had a weak to mixed financial performance since 2008. After several years of struggles, Semcon set a clear path, focusing on profitability. In the past five years, it increased year after year its profitability. In 2020, Semcon, despite the pandemic, improved its EBIT margin by 0.4 pts to 8.0%. 2021 will see a better margin improvement. By onshore standards, the company now has EBIT margins in line with the best vendors.

Semcon Accelerates the Transformation of EDS

Engineering and Digital Services has been through an accelerated transformation during the pandemic. The unit changed its general manager, with Semcon’s CEO taking over. In Q2 2020, Semcon made lay-offs, assumedly in automotive. It also divested its Indian operations, which provided mechanical and electronics engineering services. The divested Indian operations had 192 employees and SEK 17m in revenues, suggesting it serviced the local market. Finally, EDS is also shifting its commercial focus away from its historical strength, automotive, to higher-growth markets, mostly life science. 

EDS is now shifting its portfolio. Two years ago, the business unit created a digital unit focusing on data and AI, IoT, autonomous vehicles (targeting secluded areas), and UX. It is now back to M&As with two tuck-in acquisitions in 2021. Semcon acquired Squeed in May 2021. Squeed brought SEK 105m in revenues and 95 FTEs. Squeed provides agile development services but operates outside of ER&D services. The company services clients in retail and financial services. We expect Semcon to cross-sell Squeed to its ER&D clients. In October 2021, Semcon also acquired Tedsys, the software and embedded systems unit of Sweden-based Tedkom. Tedsys bring a presence in Sweden’s third-largest city in Sweden, Malmö, right-facing Copenhagen. Tedys had SEK 50m in revenues and 50 employees.

Semcon believes it now is a growth story. The company has a positive net cash balance (SEK 189m at the end of Q3 2021). It can now make tuck-in acquisitions (two to three per year, we think) regularly. Semcon will need M&As to change its profile. In Q3 2021, despite the very favorable comparison basis (Q3 2020 organic revenue decline of 24%), organic growth was up by only 3.2%…

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