PSI — Update 10 November 2016

TMT

PSI

Two steps forward one step back

Q3 results and
estimate changes

Software & comp services

10 November 2016

Price	€12.06
Market cap	€189m
€1.13/£
Net cash (€m) at 30 September, excludes €47m pension provision		34.4

Shares in issue	15.6m
Free float	76%
Code	PSAN

Primary exchange	Frankfurt
Secondary exchange	Munich

Share price performance

%	1m	3m	12m
Abs	(7.9)	(11.4)	(11.7)
Rel (local)	(9.3)	(11.0)	(10.2)

52-week high/low

€14.42

€11.60

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

German Equity Forum

21-23 November

Analyst

Dan Ridsdale

+44 (0)20 3077 5729

tech@edisongroup.com

Edison profile page

PSI is a research client of Edison Investment Research Limited

Edison profile page

PSI’s underwhelming financial performance and lower revenue guidance for FY16 reflect difficult trading conditions as well as retaining price discipline and moving away from lower-quality business lines. The transformation of the PSI’s model should advance in FY17 with the migration of key Production Management modules to its new software platform. We still see significant upside potential if PSI can execute its plan and expand margins well into double digits, although this may be at the expense of organic top-line growth in the near term.

Year end	Revenue (€m)	PBT* (€m)	EPS* (c)	DPS (c)	P/E (x)	Yield (%)
12/14	175.4	5.9	27.50	0.0	43.9	0.0
12/15	183.7	9.6	49.07	21.0	24.6	1.7
12/16e	181.1	10.8	56.77	25.0	21.2	2.1
12/17e	187.6	12.9	67.73	30.0	17.8	2.5

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

Trading reflects weak conditions, better discipline

Order intake for 9M16 declined 10% y-o-y at €134m, while revenues fell by 6% to €129m, with declines in each division but particularly Infrastructure Management where the weakness and restructuring of PSI InControl continues to drag on results. The reduction in group EBIT by 5% to €6.9m was entirely due to Infrastructure Management dropping to a loss. EBIT for Production Management grew 15% y-o-y and was flat in Energy Management against a strong comparator last year. Reflecting revised FY16 guidance of a slight decline in revenues (previously mid-single-digit growth) with EBIT of €11-13m (unchanged), we have reduced our FY16 revenue by 6% and EPS by 3% with respective downgrades of 7% and 9% for FY17.

Transition set to accelerate in FY17

Despite this, we believe there are signs that the company’s transition to a more product-centric and ultimately higher-margin model is becoming more meaningful. Notably, the migration to the unified software platform looks set to accelerate, as key Production Management modules (specifically Automotive and Industry) are rolled out to existing and new customers over FY17. This transition will take time and may continue to suppress revenue growth in the near term, but the potential for earnings growth through margin expansion from the current level (6.2% for FY16) to mid to high teens enjoyed by more product-centric peers is significant.

Valuation: Upside hinges on margin expansion

PSI’s P/E rating of 21.2x for FY16, dropping to 17.8x in FY17 is towards the lower end of the company’s broader peer group. The upside case hinges on PSI’s scope to significantly expand margins and deliver above-average earnings growth. Our DCF analysis shows that with no revenue growth, expansion of operating margins to 12.5% should justify a share price of €15.5. Achieving 15% would justify a share price closer to €20.

Investment summary

Difficult conditions, price discipline and corrective action

Group level declines in order intake (-10% y-o-y at €134m) and revenues (-6% to €129m) reflect both difficult market conditions in a number of segments and price discipline and efforts to transition the company to a more scalable, higher-margin, product-centric model.

We believe this is shown by the company’s margin performance. Whereas group EBIT reduced by 5% y-o-y, factoring in operational gearing, this is smaller than what one would normally expect given the similar level of revenue decline.

Moreover, the reduction in EBIT was entirely due to the Infrastructure Management division dropping to a loss (sales down 16% to €16.5m, EBIT down €0.9m from break-even last year). This is primarily due to restructuring in the problematic South East Asia PSI (previously In Control), where the company is migrating to a software-centric model whereas previously revenues were boosted by hardware sales.

Margins expanded in both Energy Management, with sales down 2% to €43.3m and EBIT broadly flat at €5.8m on a strong comparator, and Production Management, where sales reduced by 4%
y-o-y to €95.8m but EBIT increased 11% to €6.6m.

Estimate changes

Our estimate changes are shown in Exhibit 1. Management has reduced FY16 revenue growth guidance to slightly down year-on-year but maintained the €11-13m EBIT guidance range. We reduce our group EBIT forecast to the lower end of this range (€11.4m from €12.3m), although a lower finance charge reduced moderates the impact on EPS (down 3% to 56.7c).

Exhibit 1: Estimate changes

€m	2014	2015	2016e	2016e		2017	2017e
	Actual	Actual	Old	New	Change	Old	New	Change
Energy Management
Revenue	64.1	67.2	68.6	68.6	0%	69.9	69.9	0%
Growth	5%	5%	2%	2%		2%	2%
EBITDA	5.5	6.8	7.0	7.5	7%	7.3	7.3	0%
EBITDA margin	9%	10%	10%	11%		11%	11%
Production Management						0.0
Revenue	79.6	86.4	94.2	89.5	-5%	100.8	94.0	-7%
Growth	-5%	9%	9%	4%		7%	5%
EBITDA	3.8	8.0	9.1	9.0	-1%	10.6	10.1	-5%
EBITDA margin	5%	9%	10%	10%		11%	11%
Infrastructure Management
Revenue	31.6	30.1	30.1	23.0	-23%	30.7	23.7	-23%
Growth	-5%	9%	9%	4%		7%	5%
EBITDA	2.9	1.6	1.5	0.3	-80%	2.8	1.5	-44%
EBITDA margin	9%	5%	5%	1%		9%	7%
Group
Total sales	175.4	183.7	192.8	181.1	-6%	201.4	187.6	-7%
EBITDA	11.1	15.3	16.4	15.6	-5%	19.4	17.7	-9%
Operating profit (reported)	7.2	11.1	12.2	11.4	-6%	15.2	13.5	-11%
Operating margin	4.1%	6.0%	6.3%	6.3%		7.5%	7.2%
Profit before tax (FRS 3)	5.7	9.4	11.0	10.6	-3%	14.0	12.7	-9%
EPS - normalised and fully diluted (c)	27.5	49.1	58.6	56.8	-3%	74.3	67.7	-9%
EPS - FRS 3 (c)	26.2	47.8	57.3	55.5	-3%	73.0	66.4	-9%
Dividend (c)	0.0	21.0	25.0	25.0	0%	30.0	30.0	0%
Net debt (cash)

Source: Company data, Edison Investment Research

Valuation

PSI’s P/E rating remains toward the lower end of its broader peer group, which is understandable given the company’s growth profile is lower than most peers. The company’s substantially lower EV/sales ratio highlights the potential upside if the company can bring margins closer to the level of its software peers. This transition is challenging and we need to bear in mind that this may be at the expense of organic top-line growth in the near term. However, with the restructuring of PSI South East Asia and the planned rollout of more of the new software platform across more of the Production Management business, we believe that this transition is starting to become more meaningful.

Exhibit 2: Peer valuation

	Share price currency	Share price	Market cap (m)	EV/sales (x)		P/E (x)		EBIT margin (%)
	Share price currency	Share price	Market cap (m)	Current	Next	Current	Next	Current	Next
PSI	€	12.1	189	0.8	0.8	21.2	17.8	6.4	7.3
Local peers
Init Innovation In Traffic Systems AG	€	15.6	157	1.5	1.4	19.6	16.2	11.2	12.3
Nemetschek SE	€	56.0	2,154	6.4	5.5	38.0	32.7	21.5	21.8
International industrial software
ANSYS Inc	US$	91.4	7,967	7.2	6.7	25.2	23.4	47.6	48.2
Autodesk Inc	US$	72.3	16,038	7.3	6.5	neg.	2,492.4	-8.4	1.3
AVEVA Group PLC	£	1838.0	1,176	5.0	4.8	26.0	24.1	24.4	26.4
Constellation Software Inc/Canada	US$	628.4	13,316	4.8	4.2	25.6	21.4	15.6	16.3
Dassault Systemes	€	71.9	18,547	5.7	5.2	29.2	26.3	25.5	27.1
Emerson Electric Co	US$	50.7	32,614	1.8	2.1	17.4	18.7	14.6	16.0

Source: Edison Investment Research, Bloomberg. Note: Prices at 3 November 2016.

A discounted cash flow analysis suggests the current valuation is pricing in flat or low single-digit organic revenue 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% in the same timescale would justify a valuation well above €20.

In Exhibit 3, we show a DCF sensitivity analysis assuming the company reaches different operating margins by the year 2022 and differing organic revenue growth rates between now and 2022.

Exhibit 3: DCF share price (€) sensitivity analysis to revenue growth and EBIT margin

		EBIT margin attained by 2022
		5.0%	7.5%	10.0%	12.5%	15.0%
Organic revenue growth rate to 2020	0%	4.8	8.3	11.9	15.4	18.9
	2%	4.6	8.6	12.5	16.5	20.5
	4%	4.4	8.8	13.3	17.7	22.1
	6%	4.2	9.1	14.1	19.0	23.9
	8%	3.9	9.4	14.9	20.4	25.9
	10%	3.7	9.8	15.9	22.0	28.1

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 4: 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	181.1	187.6
Cost of Sales		(34.8)	(33.1)	(31.6)	(31.1)	(32.3)
Gross Profit		141.5	142.3	152.1	149.9	155.3
EBITDA		8.0	11.1	15.3	15.6	17.7
Operating Profit (before aqu'd int amortisation.)		4.4	7.4	11.3	11.6	13.7
Amortisation of acquired intangibles		(0.2)	(0.2)	(0.2)	(0.2)	(0.2)
Operating Profit		4.2	7.2	11.1	11.4	13.5
IFRS 2 charges		-	-	-	-	-
Net Interest		(1.6)	(1.5)	(1.7)	(0.8)	(0.8)
Profit Before Tax (norm)		3.3	5.9	9.6	10.8	12.9
Profit Before Tax (FRS 3)		3.1	5.7	9.4	10.6	12.7
Tax		(2.7)	(1.6)	(2.0)	(1.9)	(2.3)
Profit After Tax (norm)		1.7	4.3	7.7	8.9	10.6
Profit After Tax (FRS 3)		0.4	4.1	7.5	8.7	10.4

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	56.8	67.7
EPS - normalised fully diluted (c)		10.6	27.5	49.1	56.8	67.7
EPS - FRS 3 (c)		2.4	26.2	47.8	55.5	66.4
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%	8.6%	9.5%
Operating Margin (before GW and except.) (%)		2.4%	4.1%	6.0%	6.3%	7.2%

BALANCE SHEET
Fixed Assets		69.3	80.5	78.8	77.1	76.6
Intangible Assets		49.1	61.7	59.4	58.2	56.9
Tangible Assets		13.8	12.9	12.2	11.8	12.5
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	125.4	134.1
Stocks		3.9	3.5	4.2	5.5	5.5
Receivables		77.8	73.6	72.5	74.0	75.2
Cash		21.8	29.3	38.8	40.7	48.3
Other		5.3	5.4	5.2	5.2	5.2
Current Liabilities		(64.8)	(75.7)	(79.0)	(69.8)	(71.2)
Trade & Tax Payable		(35.5)	(41.1)	(43.7)	(38.0)	(39.4)
Short term borrowings		(3.5)	(5.1)	(5.1)	(1.6)	(1.6)
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)	(0.0)	(0.0)
Pension provision & other long term liabilities		(42.6)	(48.0)	(49.0)	(49.0)	(49.0)
Net Assets		67.4	68.3	71.3	83.5	90.5

CASH FLOW
Operating Cash Flow		1.8	27.4	17.3	8.9	17.0
Net Interest		(0.2)	(0.2)	(1.7)	0.6	0.6
Tax		(1.6)	(1.3)	(2.6)	(1.9)	(2.3)
Capex		(5.0)	(3.0)	(3.0)	(2.5)	(3.8)
Acquisitions/disposals		1.0	(11.5)	0.7	0.0	0.0
Financing		(0.6)	(0.5)	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	1.8	7.6
Opening net debt/(cash)		(24.0)	(14.9)	(24.0)	(35.4)	(37.2)
HP finance leases initiated		0.0	0.0	0.0	0.0	0.0
Other		(0.5)	(0.5)	0.4	0.0	0.0
Closing net debt/(cash)		(14.9)	(24.0)	(35.4)	(37.2)	(44.8)

Source: PSI data, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by PSI and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

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

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

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

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

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

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

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

Equities

Equities by Sector

Sectors

Investment Strategy

Latest

Equity strategy and market outlook – March 2024

Equity strategy and market outlook – February 2024

Equity strategy and market outlook – January 2024

Thematics

Latest

Listed private equity – Performing a balancing act

ConsumerWatch – At least someone loves me

MediaWatch – Rinse and repeat

Audiovisual

Latest

IP Group – executive interview

Take on Trusts – March 2024

Oakley Capital Investments – executive interview

About Edison

About Edison

Careers

PSI Software (PSAN)

PSI — Update 10 November 2016

TMT

TMT

Latest

discoverIE Group — FY24 EPS in line; good margin progress

Ultimovacs — Steadfast commitment to UV1 progression

OSE Immunotherapeutics — AbbVie deal clears antitrust hurdle

Jersey Electricity — Decarbonisation fuelling growth

Foxtons Group — FY24 underpinned by market share gains

More on PSI Software

PSI Software — Energetic results across the grid

PSI — Update 10 November 2016

PSI — Update 15 April 2016

PSI — Update 22 November 2015

Latest from the TMT sector

discoverIE Group — FY24 EPS in line; good margin progress

Next 15 Group — Baked in AI opportunities

IP Group — Several potential portfolio catalysts on the horizon

Checkit — New product launch and contract wins

Cobham — Update 10 November 2016

Subscribe to Edison