First Berlin Equity Research has published a research update on PSI AG (ISIN: DE000A0Z1JH9). Analyst Simon Scholes reiterated his BUY rating and decreased the price target from EUR 40.00 to EUR 37.00.
Q3/22 EBIT of €6.1m was clearly better than the Q2/22 result of €3.7m which was hit by €4m-€5m in costs in connection with additional work done for three municipal utilities in connection with Redispatch 2.0. A temporary local breakdown in PSI’s billing procedures, and the financial pressure which high gas purchase prices are exerting on municipal utilities mean that so far PSI has been unable to recoup these costs. Management indicated in the profit warning at the beginning of October that negotiations to recover this money are likely to continue into 2023. At the end of September, the German government set up a €200bn economic stabilisation fund to cushion the impact of higher energy prices on companies, consumers and utilities. The mechanisms through which these funds will be allocated have yet to be finalised. However, a meeting of the Minister Presidents of the German Länder in Lower Saxony on 20 and 21 October (also attended by the federal Economics Minister Habeck and Finance Minister Lindner) concluded with a call for financial support for both municipal and local utilities. We expect that the Federal Government will allocate a significant portion of the fund for this purpose. This should aid the settlement of PSI’s claims on the three municipal utilities and also spark some recovery in investment by the rest of the sector. Meanwhile, Production Management reported a 22.9% y-o-y increase in Q3/22 sales (11.2% for 9M/22) and a record third quarter margin of 18.0%. Q3/22 results show that PSI is on track to achieve revised 2022 EBIT guidance of €20m. The outlook for 2023 is for a return to sales and profit growth. We believe investors‘ focus will now return to the company’s excellent prospects in the ongoing renewables investment boom. We maintain our Buy recommendation but have lowered the price target from €40.00 to €37.00. The price target reduction reflects the early October profit warning (previous 2022 guidance was for EBIT of €25.1-€26.3m) and an increase in our WACC estimate from 7.35% to 7.8% due to an increase in the German 10-year government bond yield since our last note of 25 August.