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 52.00 to EUR 40.00.
H1/22 results were below our forecast because of a dip in profitability in the Energy Management business in Q2/22. Some contracts in this segment are fixed-price and in some cases PSI was unable to pass increased costs on to customers. Passing on higher costs was made more difficult because some customers have their own fixed price contracts and were unable to pass on higher energy purchase prices to their own customers. EBIT at Energy Management was negative in Q2/22 but we expect results to be back in the black from the current quarter. As CEO Schrimpf explained in a radio interview given shortly after publication of the H1/22 results, three municipal utilities (Stadtwerke) accounted for most of Energy Management’s Q2/22 losses. H1/22 results included not only losses actually incurred in Q2/22, but provisions for estimated future losses on the contracts with the three municipal utilities. We believe that this provisioning is on the conservative side. Over the coming quarters pressure on those PSI Energy Management customers currently experiencing financial difficulties is likely to ease as they pass on higher energy prices (cf. consumer gas price rise sanctioned by the German state from 1 October). Meanwhile, new Energy Management contracts will of course reflect PSI’s higher costs. In early July the German Bundestag passed the ?Easter Package? which sets the framework for accelerated expansion of wind and solar power in Germany. We continue to assume investment in the German power distribution grid of €150bn by 2030. This implies annual investment during the rest of this decade at over twice the level seen during the five years ending December 2020. The increase in investment in network ?smartification,? which is the relevant metric for PSI, is likely to be even higher. PSI Metals is the world’s leading metals production software business. Its order intake doubled during H1/22 as steel producers started or continued multi-year, multi-country rollouts of PSI software. Following the group’s light Q2/22 numbers we have lowered our price target to €40.00 (previously: €52.00) but maintain our Buy recommendation.