PSI — Update 15 April 2016

PSI Software (PSAN)

Last close As at 05/11/2024

11.96

0.00 (0.00%)

Market capitalisation

188m

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Research: TMT

PSI — Update 15 April 2016

PSI

Analyst avatar placeholder

Written by

TMT

PSI

Understandably cautious

FY results, estimate changes

Software & comp services

15 April 2016

Price

€12.51

Market cap

€195m

€1.25/£

Net cash (€m) at 31 December 2015
(excluding €47m pension provision)

35.4

Shares in issue

15.6m

Free float

76%

Code

PSAN

Primary exchange

Frankfurt

Secondary exchange

Munich

Share price performance

%

1m

3m

12m

Abs

(11.5)

(4.6)

4.1

Rel (local)

(12.4)

(7.4)

26.1

52-week high/low

€14.42

€10.32

Business description

PSI develops and integrates software control systems for critical infrastructure across a range of end markets including Energy Management (electricity, gas and oil) Production Management (manufacturing, metal processing, mining and Infrastructure (logistics, public transport).

Next events

Q1 results

28 April 2016

Q2 results

27 July 2016

Q3 results

31 October 2016

German Equity Forum

21-23 November 2016

Analyst

Dan Ridsdale

+44 (0)20 3077 5729

PSI is a research client of Edison Investment Research Limited

PSI’s full year results were as expected and order intake was healthy. However, caution over the current turbulent economic and currency environment prompts a 17% reduction to our FY16 EPS estimate. We still believe that PSI’s long-term margin expansion strategy remains intact, while the valuation only appears to be pricing in partial success on this front. In our view the risk/reward trade-off is positive.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

175.4

5.9

27.5

0.0

45.5

N/A

12/15

183.7

9.6

49.1

21.0

25.5

1.7

12/16e

192.8

11.2

58.6

25.0

21.3

2.0

12/17e

201.4

14.2

74.3

30.0

16.8

2.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Results in line; robust margin recovery

PSI’s full year results are in line with our estimates and guidance, with EBIT margins expanding by 190bp to 6.3%, driving 79% y-o-y EPS growth. The expansion of margins was driven primarily by production management (a recovery in logistics from the execution issues which affected FY13/14 and FY15 and Energy Management (domestic Electricity strength), offset by weakness in Infrastructure Management (Incontrol).

Recent weakening in outlook

While order intake was robust at €195m, up 6% y-o-y (Q4 up 9% at €51m), EBIT guidance of €11-13m (Edison was previously estimating €14.5m) was cautious, with the company citing increased demand uncertainty in upstream oil and gas and strengthening currency headwinds since the start of the year. This prompts cuts of 18% and 10% to our FY16 and FY17 EPS estimates respectively.

Margin expansion drive taking longer but still intact

The current economic and currency headwinds mean we will need to wait a little longer. However, we believe that the company’s longer-term margin expansion strategy, based on consolidation of products onto a single platform and shift to a product vs project lead model, remains intact. With good execution on the transformation plan, we believe that EBIT margins can be expanded from 6% in FY15 to the mid-teens level within five to seven years (vs three to five previously).

Valuation: Margin expansion key to upside

PSI’s forward P/E rating of 21.3x for FY16, dropping to 16.8x in FY17, while not particularly compelling, is towards the lower end of the company’s broader peer group. However, we believe PSI’s scope to significantly expand margins gives the potential to deliver above-average earnings growth. Our DCF analysis shows that expansion of operating margins to 12.5% should justify a share price higher than €17, while achieving 15% would justify a share price closer to €20.

Investment summary

Control software for critical infrastructure

PSI (Gesellschaft Fuer Produkte und Systeme der Informationstechnologie) develops, sells and integrates software for controlling complex systems, networks and infrastructures. Its systems are crucial components within these systems, enabling them to run efficiently, improving flexibility and avoiding failure.

Exhibit 1: Electrical energy control room

Exhibit 2: Other product screen shots

Source: PSI

Source: PSI

Exhibit 1: Electrical energy control room

Source: PSI

Exhibit 2: Other product screen shots

Source: PSI

For reporting purposes, the company has three key segments:

Energy Management – the company’s systems are used to ensure a stable and dependable supply of electricity, gas, oil, heat or water;

Production Management – solutions for optimising metal processing, automotive production, mechanical engineering and mining processes; and

Infrastructure Management – highly resilient control systems for managing and monitoring road, rail and other public transport systems.

Each of these segments is made up of a number of more focused businesses, each offering optimised solutions and expertise to address more specific industry verticals. These divisions are shown in Exhibit 3, which highlights the divisions that are most influential to the overall group result: PSI Metals, Electricity and Multi-Utility, Automotive and Industry, Oil and Gas and Incontrol.

The company transacts business across the globe, with Germany accounting for circa 51% of sales as a result of a strong domestic position in Electrical and Multi-Utility Energy, Logistics and Automotive & Industrial divisions.

Two key initiatives are being implemented to add resilience to earnings and put the business back on a margin expansion trajectory. Firstly, the shift towards a product-led vs project-based model should reduce exposure to cost overruns and improve the working capital profile. Secondly, the progressive migration of customers and products onto a unified technology platform should help improve development and implementation efficiency and reduce overheads.

Exhibit 3: FY15 revenue by segment, division and region

Source: PSI data, Edison Investment Research

Divisional update

Energy Management (37% of group revenues)

Segment revenues increased by 4.8% to €67.2m, with operating profit improving from €4.8m to €5.3m.

Energy and Multi-Utility – electricity strong, some caution around gas

This segment’s growth was driven primarily by the energy management segment (c 21% of group sales), which supplies solutions for managing electrical power generation and distribution systems in the German and neighbouring markets. Robust demand is being driven by structural investment in PSI’s solutions, which enable the grid to adapt to more volatile, renewables-based supply and the cyclical demand upswing related to Germany’s energy tariff setting cycle. The division typically experiences a three-year demand upswing in the years preceding during the “photo year” in which tariffs are set, which is 2016 for electricity and 2015 for gas (although the former is much more significant for PSI). Consequently, the company expects robust demand from electricity to continue in FY16, but is more cautious on the near-term outlook for gas. The reduction of the tariff setting cycle from five years currently to four should help smooth the division’s demand profile moving forward.

Oil and Gas margins affected by shift from upstream to downstream

Demand from Oil and Gas (c 12% of revenue) remained stable over the period. At the revenue level, the company expects to broadly offset weakness in the upstream business (with a significant customer base in Russia, so also exposed to currency headwinds) with the development of its downstream business in western markets. Profits are expected to be negatively affected however, due to the higher than average margins of the upstream business, where the company works with integration partners and the licensing component of revenue is higher.

Production Management (47% of group revenues)

Revenues in the Production Management segment grew by 8.5% to €86.4m, with operating profit expanding significantly to €6.2m from €2.2m in 2014. The revenue growth was largely due to the full year contribution from Broner (acquired in November 2014), although the exact contribution is not disclosed, and the Broner product is being discontinued (the acquisition was largely made to acquire customer relationships), making the exact contribution difficult to isolate. The significant expansion in profitability is mainly due to the robust recovery of the logistics division from significant execution issues and cost overruns in FY14.

PSI Metals – Signs the steel investment cycle has bottomed

Given the weakness in the global steel industry, PSI Metals, the largest division within the segment (c 23% of group sales) performed solidly, maintaining margins at around the 10% level. Interestingly, the company is now seeing some signs that the demand cycle in steel is improving, with investment in software being key to enabling the industry to adapt to the changed supply demand dynamic. (For example the potential conversion of the Newport UK steel mill from raw material processing to recycling.) This may be somewhat offset by a slowdown in aluminium processing, although the company’s exposure to this industry is substantially lower.

PSI Automotive and Industry – Investment could start paying off

PSI Automotive and Industry (c 16% of group sales) supplies enterprise resource planning (ERP) and manufacturing execution systems (MES) primarily into the German industrial market. The division’s performance has been lacklustre for a number years, due in part to the difficulties of competing with SAP in the German mid-market. Operating margins were below 5% in 2015. However, the outlook now appears to be more positive. The initial feedback on the new client-side software platform due for launch in H1 is said to be positive. The company’s investment in playing a leading role in Industry 4.0 research could be set to pay dividends, with a number of projects looking set to move from the research phase to production deployment.

Infrastructure Management (16% of revenue)

Revenues from the Infrastructure Management segment fell to €30.1m from €31.6m in FY14, with operating profit falling to €0.7m from €2.2m in FY14 (and €3.3m in FY13).

The weak performance was primarily due to the ongoing difficulties at PSI Incontrol (c 10% of sales), the company’s South-East Asian operation, which has been affected by the weak economic and turbulent geopolitical environment in the region. The division was restructured during 2015 and returned to a profit in H2, but made a loss over the full year. A better year is hoped for in FY16, although the long-term fit with the rest of the group remains questionable given its systems integrator/reseller model versus PSI’s proprietary product lead strategy.

Following a restructuring and new product launch, prospects for the logistics division (where losses due to execution issues and project overruns in FY13 and FY14 severely damaged the overall group result) now look positive. Margins have returned to over 10%, and demand in the logistics market is being boosted by a new product offering and the rise in e-commerce.

Order book progress highlights domestic strength

Reflecting the shifting cyclical and economic landscape, growth in order intake was driven primarily by Germany, where new orders increased 14% y-o-y to €111.5m, with more modest growth across Western Europe, the Americas and China, offset by declines in Russia and Eastern Europe and the Middle East. Overall book to bill was 1.06x, driven by the strong progress in Germany (1.2x), offset by negative figures in the other regions.

Exhibit 4: Bookings progression by year

Exhibit 5: FY15 bookings vs revenue

Source: PSI

Source: PSI

Exhibit 4: Bookings progression by year

Source: PSI

Exhibit 5: FY15 bookings vs revenue

Source: PSI

Financials

Full year results were as expected and in line with guidance set at the beginning of the year at the P&L level. EBIT margins expanded by 190bp to 6.3%, driven primarily by Production Management (recovery in logistics following cost overruns in FY14) and Energy Management (Electricity), offset by weakness in Infrastructure Management (Incontrol).

Cash performance was stronger than forecast, with year-end net cash standing at £35.4m versus £27.8m forecast, reflecting lower than expected receivables and capex. A dividend of 21 cents has been declared. The pension liability stands at €47m, unchanged from last year.

However, while order intake grew by 6% y-o-y to €195m and by a robust 9% to €51m in Q4, this was slightly short of guidance for double-digit growth in orders exiting 2015 into early 2016.

The shift in mix from high-margin upstream to lower-margin downstream business in oil and gas contributes to our revenue forecast actually moving up slightly. More recent economic and geopolitical uncertainty together with currency headwinds prompted management’s guidance of
0-17% growth in operating profit (€11-13m), versus Edison’s previous €14.5m (31% growth) estimate. This prompts cuts of 17% and 10% to our FY16 and FY17 EPS estimates, respectively. The conversion of a significant deal for the Electricity and Multi-Utility division in Iran could be the swing factor between financial performance being at the lower end or the upper end of guidance.

Exhibit 6: P&L model and estimate changes

€m

2013

2014

2015

2016e

2017e

Actual

Actual

Est.

Actual

Diff.

Old

New

Change

Old

New

Change

Energy Management

Revenue

61.0

64.1

66.1

67.2

2%

67.4

68.6

2%

68.7

69.9

2%

Growth

-2%

5%

3%

5%

2%

2%

2%

2%

EBITDA

2.2

5.5

7.1

6.8

-3%

7.6

7.0

-8%

8.2

7.3

-11%

EBITDA Margin

4%

9%

11%

10%

11%

10%

12%

11%

Production Management

Revenue

84.1

79.6

81.8

86.4

6%

89.2

94.2

6%

95.4

100.8

6%

Growth

-6%

-5%

3%

9%

9%

9%

7%

7%

EBITDA

2.9

3.8

8.4

8.0

-5%

10.3

9.1

-11%

11.5

10.6

-8%

EBITDA Margin

3%

5%

10%

9%

12%

10%

12%

11%

Infrastructure Management

Revenue

31.3

31.6

31.8

30.1

-5%

31.8

30.1

-5%

32.4

30.7

-5%

Growth

-6%

-5%

3%

9%

9%

9%

7%

7%

EBITDA

4.0

2.9

1.0

1.6

71%

2.2

1.5

-32%

2.6

2.8

6%

EBITDA Margin

13%

9%

3%

5%

7%

5%

8%

9%

Group

Total sales

176.3

175.4

179.7

183.7

2%

188.4

192.8

2%

196.6

201.4

2%

EBITDA

8.0

11.1

15.3

15.3

0%

18.9

16.4

-13%

21.0

19.4

-8%

Operating profit (reported)

4.2

7.2

10.9

11.1

2%

14.5

12.2

-16%

16.7

15.2

-9%

Margin

2.4%

4.1%

6.1%

6.0%

7.7%

6.3%

8.5%

7.5%

Profit before tax (FRS 3)

3.1

5.7

9.4

9.4

1%

13.3

11.0

-18%

15.5

14.0

-10%

EPS - normalised and fully diluted (c)

10.6

27.5

50.6

49.1

-3%

71.0

58.6

-17%

82.2

74.3

-10%

EPS - FRS 3 (c)

2.4

26.2

49.3

47.8

-3%

69.7

57.3

-18%

80.9

73.0

-10%

Dividend (c)

0.0

0.0

20.0

21.0

5%

30.0

25.0

-17%

30.0

30.0

0%

Net debt/(cash)

(14.9)

(24.0)

(27.8)

(35.4)

27%

(34.3)

(40.2)

17%

(39.4)

(46.6)

18%

Source: PSI data, Edison Investment Research

Case for margin expansion still intact, but may take longer

Looking longer term, we still believe that the company’s shift towards a software vendor model and the consolidation of products onto a common platform have the potential to drive margins to the mid-teens level, although a five- to seven-year view now looks more realistic, versus our three- to five-year estimate previously.

Looking at PSI’s peer group in Exhibit 7, successful companies with pure software models and a (more or less) consolidated software platform can generate operating margins well north of 20%. While the very high margins enjoyed by the likes of AVEVA and Dassault are likely to be out of reach, we believe that with some rationalisation, broader roll-out of the new software platform and a successful shift to a standard software model, expansion to the mid-teens level should be achievable, albeit on a somewhat longer timescale than previously thought.


Valuation

Following the downgrades, PSI’s P/E rating of 21.3x 2016e earnings, dropping to 16.8x for 2017e is towards the lower end of the company’s broader peer group. The company’s substantially lower EV/sales ratio and current operating margins highlight the potential if PSI can bring its margins closer to the level of its software vendor peers.

Exhibit 7: Peer group comparison

EV/sales (x)

P/E (x)

EBIT margin

Currency

Share price

Market cap (m)

Current

Next

Current

Next

Current

Next

PSI

12.5

196

0.8

0.7

21.3

16.8

6.4%

7.6%

Local peers

Init Innovation In Traffic Systems AG

14.8

148

1.5

1.4

16.6

13.9

12.6%

13.9%

Nemetschek SE

44.3

1,705

5.3

4.7

35.3

30.0

19.3%

20.6%

International industrial software

ANSYS Inc

US$

87.7

7,708

6.9

6.4

24.3

22.2

47.5%

47.9%

Autodesk Inc*

US$

56.8

12,742

5.7

5.0

-78.7

718.5

-14.5%

1.7%

AVEVA Group PLC

£

1,559.0

997

4.4

4.3

23.7

22.3

21.5%

24.2%

Constellation Software Inc

US$

529.1

11,212

4.2

3.6

20.5

17.7

15.4%

15.6%

Dassault Systemes

70.1

18,012

5.5

5.1

28.8

25.8

28.9%

30.0%

Emerson Electric Co

US$

53.8

34,625

1.9

1.9

17.7

16.6

15.1%

16.2%

Source: Company data, Edison Investment Research estimates, Bloomberg consensus. Note: *Margins affected by restructuring. Prices as at 14 April 2016.

DCF: Margin expansion key to upside

Lengthening our margin expansion trajectory

A discounted cash flow analysis suggests that the current valuation is pricing in a low single-digit organic growth with operating margins expanding – and plateauing – at 10% by 2022. In most circumstances, expansion of operating margins to 12.5% would justify a share price above €17. Operating margin expansion to 15% would in the same timescale justify a valuation well above €20.

In Exhibit 8, we show a DCF sensitivity analysis assuming that the company reaches different operating margins by the year 2022 and differing organic growth rates between now and 2022. Given the moderation in margin expansion expectations for 2016, we have lengthened the time to reach target margin by two years, from 2020 to 2022 versus previously published valuations.

Exhibit 8: DCF share price sensitivity analysis to growth and EBIT margin expansion

EBIT margin attained by 2022

(Share price €)

5.0%

7.5%

10.0%

12.5%

15.0%

Organic growth rate to 2020

0%

4.5

8.2

12.0

15.7

19.4

2%

4.3

8.5

12.7

16.9

21.1

4%

4.1

8.8

13.5

18.1

22.8

6%

3.9

9.1

14.3

19.5

24.8

8%

3.6

9.5

15.3

21.1

26.9

10%

3.4

9.8

16.3

22.8

29.2

Source: Edison Investment Research. Note: WACC = 10%, terminal growth rate = 2%. Analysis assumes that margins expand steadily from the 2016 forecast level to 2022 target. Valuation excludes the €47m (€3/share) pension provision from both the WACC calculation and the enterprise value.

Exhibit 9: Financial summary

€m

2013

2014

2015

2016e

2017e

Year end 31 December

IAS

IAS

IAS

IAS

IAS

PROFIT & LOSS

Revenue

 

 

176.3

175.4

183.7

192.8

201.4

Cost of Sales

(34.8)

(33.1)

(31.6)

(33.2)

(34.6)

Gross Profit

141.5

142.3

152.1

159.6

166.7

EBITDA

 

 

8.0

11.1

15.3

16.4

19.4

Operating Profit (before aqu'd int amortisation.)

4.4

7.4

11.3

12.4

15.4

Amortization of acquired intangibles

(0.2)

(0.2)

(0.2)

(0.2)

(0.2)

Operating Profit

4.2

7.2

11.1

12.2

15.2

IFRS 2 charges

-

-

-

-

-

Net Interest

(1.6)

(1.5)

(1.7)

(1.2)

(1.2)

Profit Before Tax (norm)

 

 

3.3

5.9

9.6

11.2

14.2

Profit Before Tax (FRS 3)

 

 

3.1

5.7

9.4

11.0

14.0

Tax

(2.7)

(1.6)

(2.0)

(2.0)

(2.5)

Profit After Tax (norm)

1.7

4.3

7.7

9.2

11.7

Profit After Tax (FRS 3)

0.4

4.1

7.5

9.0

11.5

Average Number of Shares Outstanding (m)

15.7

15.7

15.6

15.7

15.7

EPS - normalised (c)

 

 

10.6

27.5

49.1

58.6

74.3

EPS - normalised fully diluted (c)

 

 

10.6

27.5

49.1

58.6

74.3

EPS - FRS 3 (c)

 

 

2.4

26.2

47.8

57.3

73.0

Dividend per share (c)

0.0

0.0

21.0

25.0

30.0

Gross Margin (%)

80%

81%

83%

83%

83%

EBITDA Margin (%)

4.5%

6.3%

8.3%

8.5%

9.6%

Operating Margin (before GW and except.) (%)

2.4%

4.1%

6.0%

6.3%

7.5%

BALANCE SHEET

Fixed Assets

 

 

69.3

80.5

78.8

78.4

78.2

Intangible Assets

49.1

61.7

59.4

58.2

56.9

Tangible Assets

13.8

12.9

12.2

13.1

14.2

Goodwill

0.0

0.0

0.0

0.0

0.0

Other

6.4

5.8

7.1

7.1

7.1

Current Assets

 

 

108.8

111.8

120.7

129.0

138.8

Stocks

3.9

3.5

4.2

4.0

4.0

Receivables

77.8

73.6

72.5

76.1

79.5

Cash

21.8

29.3

38.8

43.6

50.1

Other

5.3

5.4

5.2

5.2

5.2

Current Liabilities

 

 

(64.8)

(75.7)

(79.0)

(79.5)

(81.6)

Trade & Tax Payable

(35.5)

(41.1)

(43.7)

(45.9)

(48.0)

Short term borrowings

(3.5)

(5.1)

(5.1)

(3.4)

(3.4)

Other creditors

(25.7)

(29.5)

(30.2)

(30.2)

(30.2)

Long Term Liabilities

 

 

(45.9)

(48.2)

(49.2)

(49.1)

(49.1)

Long term borrowings

(3.4)

(0.2)

(0.2)

(0.1)

(0.1)

Pension provision & other long term liabilities

(42.6)

(48.0)

(49.0)

(49.0)

(49.0)

Net Assets

 

 

67.4

68.3

71.3

78.7

86.3

CASH FLOW

Operating Cash Flow

 

 

1.8

27.4

17.3

13.7

16.7

Net Interest

(.2)

(.2)

(1.7)

0.2

0.2

Tax

(1.6)

(1.3)

(2.6)

(2.0)

(2.5)

Capex

(5.0)

(3.0)

(3.0)

(3.9)

(4.0)

Acquisitions/disposals

1.0

(11.5)

0.7

0.0

0.0

Financing

(.6)

(.5)

0.0

0.0

0.0

Dividends

(4.7)

(1.2)

0.1

(3.3)

(3.9)

Net Cash Flow

(8.6)

9.7

10.9

4.8

6.4

Opening net debt/(cash)

 

 

(24.0)

(14.9)

(24.0)

(35.4)

(40.2)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(.5)

(.5)

0.4

0.0

0.0

Closing net debt/(cash)

 

 

(14.9)

(24.0)

(35.4)

(40.2)

(46.6)

Source: PSI accounts, Edison Investment Research estimates

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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