Incap Posts Strong Revenue Growth for H1 2018
Key Figures in January-June 2018
- Incap Group's revenue in January-June 2018 increased by 13% on corresponding period last year and amounted to EUR 27.0 million (1-6/2017: EUR 23.8 million).
- The Group's operating profit (EBIT) increased on corresponding period by 37% and amounted to EUR 3.1 million, being 11% out of revenue (EUR 2.3 million or 10% out of revenue).
- Net profit for the report period improved year-on-year and amounted to EUR 2.1 million (EUR 1.6 million).
- The company updates its guidance and estimates that the Group's full-year revenue and operating profit (EBIT) in 2018 are higher than in 2017, provided that there are no major changes in exchange rates or in material availability. In 2017 the full-year revenue was EUR 48.5 million and the operating profit (EBIT) EUR 4.5 million.
Key Figures in April-June 2018
- The revenue of the second quarter amounted to EUR 14.5 million, showing an increase of 13% compared with the corresponding period last year (4-6/2017: EUR 12.8 million) and up 16% compared with the first quarter of the year (1-3/2018: EUR 12.5 million).
- Operating profit (EBIT) for the second quarter was EUR 1.9 million, i.e. approximately 50% higher than in the corresponding period last year (4-6/2017: EUR 1.3 million) and approximately 67% higher than in the first quarter (1-3/2018: EUR 1.1 million).
Incap Group's interim CEO Otto Pukk:
"Our business performance was strong during the first half of the year and especially the second quarter was excellent both as to revenue and operating profit.
The growth of revenue was mainly attributed to the increased demand of our established customers. We also proceeded in the new customer acquisition and expect that the introduction of new products will reflect in the revenue as from the end of the year.
We are especially delighted of the good profitability. Thanks to our streamlined operational model we have succeeded in keeping the overhead costs low. When developing our operations we continue to focus on functions, which bring the highest added value to our customers.
The performance of our Indian factory continued strong. Expansion of the premises is in use and a new SMT assembly line will be in place during the second half of the year, enabling further increase of production volumes in the factory.
The business of the factory in Estonia showed a stable performance and the factory has updated its capability to produce medical devices in accordance with the latest ISO 13485/2016 certificate. The capacity and flexibility of the new production line has been increased by supplementary minor investments.
Current problems in the availability of components in electronics manufacturing services business have escalated during the first half of the year. We have prepared for the shortage of components by increasing our inventory moderately and we work closely with our suppliers in order to secure deliveries to our customers as agreed.
All in all, we are happy with the development during the first half of the year and trust that the positive trend will continue during the rest of the year. General outlook in the electronics contract manufacturing is good and we have a firm belief in our competitive edge in this market also in future, based on our efficient operational model."
Incap Group's Revenue and Earnings in January-June 2018
Revenue for January-June amounted to EUR 27.0 million, showing an increase of 13% year-on-year (1-6/2017: EUR 23.8 million) and being 9% higher than in the latter half of the year 2017 (7-12/2017: EUR 24.8 million). The revenue growth was caused by the increased manufacturing volumes in the Indian factory for long-term established customers.
The operating profit (EBIT) for January-June amounted to EUR 3.1 million, improving by 37% when compared with the corresponding period last year (EUR 2.3 million) and the second half of 2017 (EUR 2.3 million). The operating profit margin for the report period amounted to 11% (10%), which is generally considered to be a good level in the business of electronics manufacturing services.
Weakening of the Indian Rupee in relation to Euro lowered the revenue by approximately EUR 1.5 million and the operating profit by approximately EUR 0.2 million.
Personnel expenses in the report period increased in line with the growing business volumes and amounted to approximately EUR 2.4 million (EUR 2.0 million). The value of inventories increased to EUR 9.2 million based on the growth of business volumes and the preparation for shortage in components (EUR 8.0 million).
Net financial expenses amounted to EUR 0.3 million (EUR 0.3 million) and depreciation to EUR 0.2 million (EUR 0.2 million).
Net profit for the period was EUR 2.1 million (EUR 1.6 million). Earnings per share were EUR 0.48 (EUR 0.36).
Investments
Investments in the report period totalled EUR 0.5 million (EUR 0.7 million), and they were connected with the increase of efficiency and flexibility of production lines.
Balance Sheet, financing and Cash Flow
The balance sheet total on 30 June 2018 stood at EUR 27.7 million (EUR 25.8 million) and the Group's equity was EUR 12.0 million (EUR 9.8 million). The equity ratio improved from the comparison period and was 43.4% (37.9 %).
Liabilities decreased on the comparison period to EUR 15.6 million (EUR 16.0 million), out of which EUR 5.6 million (EUR 7.4 million) were interest-bearing. Net debt decreased to EUR 2.0 million (EUR 3.4 million). Net gearing improved and was 27% (39%).
The covenants of the company's loans include among others equity ratio and the Group's interest-bearing debt in relation to EBITDA, and their status is reviewed every six months. In the review on 30 June 2018 the target level of interest-bearing debt in relation to EBITDA was below 2.5 and the target for equity ratio 25.0%. The company met these covenants as the actual interest-bearing debt/EBITDA on the review date was 1.0 and the equity ratio 43.4%.
The Group's non-current interest-bearing liabilities amounted to EUR 1.0 million (EUR 3.3 million) while the current interest-bearing liabilities were EUR 4.6 million (EUR 4.2 million). Approximately EUR 2.0 million of liabilities concern the Indian subsidiary (EUR 2.1 million). Other liabilities include EUR 1.7 million of bank loans and limits granted by the company's Finnish bank and EUR 2.0 million of factoring financing used in Estonia.
As to the loans granted by the Indian bank the company has committed to follow ordinary covenants and the bank's general loan conditions.
The Group's cash position during the report period was good. The Group's quick ratio was 0.9 (1.0), and the current ratio was 1.6 (1.6).
Cash flow from operations was EUR 1.5 million (EUR 2.5 million). On 30 June 2018, the Group's cash and cash equivalents totalled EUR 2.3 million (EUR 3.7 million). The change in cash and cash equivalents showed a decrease of EUR 0.6 million (decrease of EUR 1.5 million).
Aspects related to the Group's financing and liquidity are also described in the section "Short-term risks and factors of uncertainty concerning operations".
Personnel and Management
At the end of report period, Incap Group had a payroll of 667 employees (517). 89% (83%) of the personnel worked in India, 10% (16%) in Estonia and 0.4% (0.6%) in Finland. The average number of personnel during the report period was 628 (513).
The Group's CEO was changed on 25 June 2018 when Vesa Mäkelä left his duty and Otto Pukk was appointed as the interim CEO. Otto Pukk took the position along with his duties as the managing director for Incap's subsidiary in Estonia. The company has started the search process for the new CEO and aims at filling the position as soon as possible.
Board of Directors and Auditor
In the Annual General Meeting held on 17 April 2018 Carl-Gustaf von Troil was re-elected and Päivi Jokinen and Ville Vuori were elected as new members to the Board of Directors. From among its members, the Board elected Carl-Gustaf von Troil to the Chairman of the Board.
The firm of independent accountants Ernst & Young Oy was re-elected as the company's auditor, with Bengt Nyholm, Authorised Public Accountant, acting as the principal auditor.
Shares and Shareholders
Incap Corporation has one series of shares, and the number of shares at the end of the period was 4,365,168 (30 June 2017: 4,365,168).
During the report period, the share price varied between EUR 5.70 and 6.80 (EUR 5.25 and 6.10). The closing price for the period was EUR 5.78 (EUR 5.81). The trading volume during the report period was 2,062,106 shares (1,329,377 shares). The market capitalisation on 30 June 2018 was EUR 25.2 million (EUR 25.4 million). At the end of report period, the company had 2,615 shareholders (2,711). Nominee-registered or foreign owners held 3.5% (36.6%) of all shares. The company does not hold any of its own shares.
The company announced on 20 February 2018 the following changes in holdings:
- The holding of Oy Etra Invest Ab out of Incap Corporation's shares and votes has exceeded the flagging limit and it holds as from 19 February 2018 838,000 shares and 19.2% of all shares and voting rights of Incap.
- The holding of Joensuun Kauppa ja Kone Oy/K22 Finance Oy out of Incap Corporation's shares and votes has exceeded the flagging limit and it holds as from 19 February 2018 504,100 shares and 11.55% of all shares and voting rights of Incap.
- The holding of IFF Konsult Ab out of Incap Corporation's shares and votes has decreased below the flagging limit and it holds as from 19 February 2018 no shares of Incap.
- The holding of FBM Consulting Ab out of Incap Corporation's shares and votes has decreased below the flagging limit and it holds as from 19 February 2018 no shares of Incap.
- The holding of Nordea Life Insurance Suomi Oy out of Incap Corporation's shares and votes has exceeded the flagging limit and it holds as from 19 February 2018 614,099 shares and 14.07% of all shares and voting rights of Incap.
Short-Term Risks and Factors of Uncertainty Concerning Operations
General risks related to the company's business operations and sector include the development of customer demand, price competition in contract manufacturing, successful acquisition of new customers, availability and price development of raw material and components, sufficiency of funding, liquidity and exchange rate fluctuations.
The company's financial position is good and the sufficiency of financing and working capital are posing no risk.
In the definition of internal transactions, the actual value added and the so-called "arm's length" principle are considered. After the cumulative losses in India were covered during the latter half of 2015, it is possible to repatriate profits of the Indian subsidiary also through distribution of dividends.
The value of the shares in subsidiaries in the parent group has a significant impact on the parent company's equity and therefore on, for example, equity ratio. Based on the value calculations in connection with the financial statements for 2017 there is no need to decrease the value of the shares in subsidiaries. However, the company estimates that there is a risk connected with the valuation of the shares of the Estonian subsidiary because of the previous unprofitable operations of the subsidiary. There is no similar risk connected with the valuation of the business of the subsidiary in India.
Demand for Incap's services and the company's financial position are affected by global economic trends and the fluctuation among customer industries. The risks connected with the demand and liquidity of customers are followed and estimated by customer. The management considers the customer relationship management to be of special importance and is putting an extra effort into it.
The company's sales are spread over several customer sectors balancing out the impact of the economic fluctuation in different industrial sectors. In January-June 2018, 85% of the total revenue of the Group came from four biggest customers.
The company's operating segment, electronics manufacturing services, is highly competitive and there are major pressures on cost level management. The company has succeeded in increasing the efficiency of its operations and in lowering the costs remarkably. Furthermore, the company's production is located in countries with competitive levels of wage and general costs.
The most significant exchange rate risk of the company is related to the Indian subsidiary. A remarkable part of the Group's operations is located in India. The fluctuation in the exchange rates between Indian Rupee and Euro may have a remarkable effect on revenue and result.
The Indian subsidiary of the company had a tax audit in 2016 and based on that the tax authorities do not approve the depreciations made on the capitalized customer contracts during accounting periods 2008/2009-2012/2013 and the transfer costs during the accounting period 2011/2012. The estimated tax effect with eventual interests is amounting to a maximum of EUR 0.4 million. The complaint raised by the company is still in the process of tax authorities. The tax debt is presented in the off-balance sheet liabilities in the balance sheet.
Strategy and Targets
Incap's good profitability trend has enabled the strong operations development, which ensures the stable organic growth. The efficient operational model of the company embraces fast decision-making and high operational flexibility. In 2018 the company is targeting at growing the volume of business further and at exploring opportunities for the expansion of operations also by mergers and acquisitions.
Outlook for 2018
Incap's estimates for future business development are based both on its customers' forecasts and on the company's own assessments.
The company updates its previous guidance and estimates that the Group's revenue and operating profit (EBIT) in 2018 will be higher than in 2017, provided that there are no major changes in exchange rates or in material availability. The company estimated previously that the revenue and operating profit would be at the same level or somewhat higher than in 2017. The Group's revenue in 2017 was EUR 48.5 million and the operating profit (EBIT) EUR 4.5 million.
About Incap Corporation
Incap Corporation is an international contract manufacturer. Incap's customers are leading suppliers of high-technology equipment in their own business segments, and Incap increases their competitiveness as a strategic partner. Incap has operations in Finland, Estonia, India and China, and the company currently employs approximately 670 people. Incap's share is listed on the Nasdaq Helsinki Ltd. as from 1997. For more information, click here.
