Solving Complex Control Problems

PSI develops and integrates software solutions for utilities, manufacturers, and infrastructure providers, automating complex control systems to reduce costs, improve efficiency and avoid catastrophe. The company is well placed in Germany and is making good progress in its strategy of expanding geographically east of Germany. It aims to grow revenues by 8% per annum and increase its EBIT margin by 1% per annum to get it closer to the industry norm level of 20%. If the company can achieve this it should break out of the trading range of the last 12 months.

Demand Should Continue Through The Cycle
PSI develops software products that are used to control complex networks and optimise mining or production. As well as simplifying complex control challenges the company’s solutions also reduce costs through lowering the cost of manufacture, optimising labour, reducing repairs, etc, and can prevent catastrophic failure from occurring. These features should ensure demand throughout an economic cycle.

International Growth
The company is well established in Germany. While the government’s energy transition policy (away from nuclear towards renewables) creates a near-term headwind domestically, international markets still offer attractive prospects and ample potential to sustain an 8% growth trajectory. Recent successes such as the contract in the Chinese coal industry are positive not only because of the financial contribution but because of the opening up of a large industry to the company.

Margin Expansion
We see ample scope to steadily expand margins through and beyond our forecast period, by growing licensing sales, higher-margin work from international markets, the move to a single development platform and lower staff costs. Through a combination of these factors, we believe 13-14% margins (from 7.5% in 2012) should be achievable on a five- to six-year view, implying a more than twofold increase in earnings.

Valuation: DCF Suggests Fair Value Of €20.3
On a P/E basis, PSI trades in line with an albeit imperfect selection of peers, although few share PSI’s potential for margin expansion. A DCF assuming six years of growth and four years of margin expansion returns a fair value of €20.3 per share. A 1% increase in EBIT margin increases the value by €1.5 per share.

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