Adjusting for more volatile times
PSI's (HN:PSI) first half saw a contraction in order book and revenues. Underlying earnings moved ahead, but were affected by adjustments and restructuring charges in logistics. A recovery in order intake and growth is expected in H2, but geopolitical risk is increasing. Hence we trim our earnings estimates for FY14 by 15% (2% underlying) and for FY15 by 11%.
Logistics hangover affects H1
H1 sales declined by 4% y-o-y to €84.2m, with EBIT dropping by 20% to €2.8m, although this included a €1m percentage of completion adjustment relating to a logistics project from 2013 and €0.5m restructuring costs again in logistics. Stripping these out, underlying profitability did improve by 22% y-o-y. Order intake at €89m was down from a robust €109m last year, although the full year intake is expected to reach the c €180m level, implying a robust recovery (circa 20% y-o-y growth) in H2. With short-term market uncertainty, the company is no longer offering profitability guidance for the full year (previously set at €12m EBIT).
Western markets robust, risk in the east
PSI has significantly diversified its geographical footprint over the past few years, without which it would have been much harder hit by the disruptions to Germany’s domestic energy market. The pendulum now appears to swinging somewhat. A recovery is now being anticipated in the German energy market, driven by the fee-setting round for German gas and electricity suppliers in 2015 and 2016 respectively. Prospects in the US are also buoyed by renewed investment in the US aluminium and steel industries. However, while structural market drivers remain in place, the near-term outlook is looking less certain in some key overseas markets, with potential sanctions in Russia, martial rule in Thailand and the local debt build up in China all clouding visibility.
Valuation: Still an interesting recovery play
Our estimate changes are detailed in Exhibit 2. Given the slow start to FY14 and the potential for increasing geopolitical uncertainty to affect PSI’s ability to win and execute business, we have reduced our FY14e EPS by 15% (2% underlying) and FY15e EPS by 11%. This leaves the shares trading on typical recovery multiples with a relatively high FY15e P/E of 19.5x, but a low EV/sales of 1.0x. We feel the ingredients for a recovery are there. With the progressive unification of the product platform and shift towards a more product-led vs project model, in our view operating margins have scope to expand to the mid-teens level over time vs our 7.2% FY15 estimate. However, this transformation will take time and patience will be needed.
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