Schaffer (ASX:SFC): Can Strategic Shifts Revive Lagging Returns on Capital?

Schaffer Corporation Limited (ASX:SFC), a diversified industrial firm with stakes in automotive leather, infrastructure, and property investments, faces a critical juncture. Over the past five years, its Return on Invested Capital (ROIC)—a key metric for assessing capital efficiency—has fluctuated, dipping to a low of 5.61% in 2023 before recovering to 7.23% in 2024. While this improvement is encouraging, Schaffer still trails peers like Automotive Leather Systems (ASX:ALS), which reported a 10.5% ROIC in 2024. This article examines the challenges Schaffer faces in boosting returns and evaluates whether its strategic shifts can drive sustainable growth.

The ROIC Dilemma: A Rocky Road

Schaffer’s ROIC struggles stem from uneven earnings performance and industry headwinds. Despite a 99% surge in net profit to $30.37 million in 2024—driven by Delta’s infrastructure wins—the company’s revenue stagnated at $112.3 million, a sign of underlying challenges in its core automotive leather division. Meanwhile, the broader industrial sector grew earnings by 8.6% annually, outpacing Schaffer’s 5.2% decline over the same period.

The firm’s dividend policy—$0.45 per share biannually (fully franked)—suggests financial stability, but retained earnings have failed to fuel sustained growth. A 50% payout ratio leaves ample capital for reinvestment, yet ROIC remains below industry benchmarks.

Strategic Shifts to Turn the Tide

1. Infrastructure and Property Plays:
   Schaffer’s Delta Corporation subsidiary has emerged as a growth engine, benefiting from government infrastructure contracts. Projects like the $94.3 million South Connect Jandakot property—up 21.6% in value since 2023—highlight its focus on high-margin, long-term assets. Management has earmarked these investments to drive ROIC to 8–10% by 2025, aligning closer to peer performance.

2. Cost Discipline and Operational Efficiency:
   The Automotive Leather division, while stable at $7.8 million in profits, faces pricing pressures. Schaffer has responded by streamlining operations and securing new automotive programs, which contributed to a 27% revenue boost in FY24. These efforts aim to reduce costs and improve margins, directly supporting ROIC.

3. Diversified Investments:
   The Group Investments division—which delivered $10.5 million to NPAT in 2024—reflects Schaffer’s balanced approach. Holdings in equity funds (e.g., SFC Global Equities) and strategic property acquisitions provide a steady income stream, reducing reliance on volatile manufacturing sectors.

Risks and Roadblocks

• Competitive Pressures: Peers like ARB Corporation (ASX:ARB) and PWR Holdings (ASX:PWH) boast ROIC of 23.18% and 21.48%, respectively, underscoring Schaffer’s need to innovate or expand its footprint.
• Earnings Volatility: A 47.7% drop in net profit in 2023—attributed to one-time costs and sector-specific disruptions—highlights the fragility of its business model.
• Valuation Concerns: With a P/E ratio of 11.1 (vs. the sector’s 20.5), investors may question whether Schaffer’s turnaround is priced in or undervalued.

The Bottom Line: A Cautionary Optimism

Schaffer’s 2024 interim dividend of $0.45 per share and NTA per share rise to $16.45 signal financial resilience, but its ROIC trajectory remains pivotal. If Delta’s infrastructure wins and property investments deliver sustained returns—as management forecasts—Schaffer could close the gap with peers.

However, the 5.2% five-year earnings decline and reliance on a few high-growth segments pose risks. Investors should monitor execution in Delta’s pipeline projects and cost-savings initiatives.

Conclusion: A Turnaround Within Reach?

Schaffer’s 7.23% ROIC in 2024 is a step forward, but the path to 8–10% ROIC by 2025 demands flawless execution. Key catalysts include:
- Delta’s infrastructure projects securing new government contracts.
- South Connect Jandakot’s valuation growth contributing to NTA.
- Automotive Leather division maintaining margins amid industry pressures.

While Schaffer’s balance sheet (current ratio of 2.08, debt-to-equity of 0.36) provides a safety net, its success hinges on transforming capital efficiency. If these strategies bear fruit, Schaffer could justify its undervalued status—and deliver returns worth betting on.

Final Take: Schaffer’s potential turnaround is plausible but hinges on execution. Investors should weigh its defensive dividend policy and strategic assets against lingering industry challenges. The next 12 months will be critical in determining whether Schaffer can finally turn the tide on its capital returns.