SMTGY - SMA Solar Technology AG: A Buy Near One-Year Low?

2023-11-13 23:37:26 ET

Summary

• SMA Solar Technology AG is all but certain to record its best year in 2023 but is currently trading near a one-year low.
• Despite strong financial performance and a third raise full-year guidance, a sharp decline in new orders and backlog is reason for concern regarding 2024.
• Higher interest rates, persisting inflation, and the danger of EU tariffs on Chinese solar modules may negatively affect demand for the company's products such as inverters and battery storage.

For SMA Solar Technology AG ( OTCPK:SMTGF ; OTCPK:SMTGY ), 2023 has been the best year in its history so far. Yet, despite a strong third quarter and first nine months, the stock currently trades near a one-year low. The company is currently valued at single-digit multiples on expected full-year 2023 earnings and a little over one times 2023 expected full-year revenue. In this article, I will try to assess whether that makes the stock a buy. Following, I will refer to the company as only "SMA Solar" in the interest of brevity. Also, I would like to point out that there is also an ADR representing 1/10 share each. Per share numbers must, obviously, be divided by ten with regard to the ADR.

Business Overview

Contrary to what the name may suggest, the company does not manufacture solar modules. Its product portfolio consists primarily of power inverters instead (it also offers various battery storage and charging solutions). The company increasingly aims to position itself as a one-stop-shop for what in Germany is called the " Energiewende " (the term describes the broad transformation towards sustainable energy). They even entered the field of hydrogen electrolysis (though this business segment is as of yet still in the early stages). While it is not exactly a price leader, SMA Solar is renowned for high quality. Anecdotally, I have been talking to an electrician a while ago who referred to one of the company's inverters as a quality product, despite slightly higher cost.

The product portfolio is broadly divided into three categories: Home Solutions (pretty much what the name suggests), Commercial & Industrial solutions (directed at mid-sized businesses) and Large Scale Solutions (again, the name is rather self-explanatory). The Large Scale Solutions segment generates the highest revenue, but the other segments are not dramatically smaller. Geographically, EMEA is by far the most important region. The German domestic market alone accounts for almost 40 percent of overall sales as of Q3 . Southern Europe, Spain in particular, is among the markets with the highest potential for future growth due to a relatively low number of installed solar units in conjunction with a high number of yearly sun hours.

Strong Q3 and 9-Month Performance

Recently, SMA Solar presented impressive Q3 results. Sales for the nine-month period ended September 30 grew 85 percent to almost € 1.34 billion. The Home Solutions segment in particular was a growth driver, more than doubling 9 month sales YoY to €486 million (from €229 million). But the other segments, too, reported impressive growth figures compared to the first nine months of 2022 at almost 75 percent (Commercial & Industrial Solutions) and 70 percent (Large Scale Solutions), respectively. The company's earnings per share reached more than three times the full year earnings recorded in 2022 (€1.61) after only nine months at €5.2. Full year guidance was raised for a third time this year to now €1.8 to €1.9 billion in revenue and an EBITDA of €285 million to €325 million, while EBIT guidance was raised to €245 million to €285 million. These results have also enabled SMA Solar to build up ample cash reserves. By year end, the company expects a net cash position of about €275 million.

Challenging Outlook

So far, SMA Solar appears to be in excellent shape. Then why the low valuation? Well, on to the bad news. Despite an exceptionally strong year, there are challenges ahead. The big negative takeaway from the Q3 report is that new orders fell sharply (-83 percent). There still is a backlog of €1.6 billion (excluding services), but that is around €400 million below Q2.

I believe that higher interest rates are one of the main factors to blame in this regard. Higher credit costs change the whole calculation with regard to the installation of solar modules and/or home storage. Also, the end of certain government subsidies for solar modules used to charge electric cars in Germany (due to the available funds being depleted) may play a role. Customers might wait in anticipation of possible new subsidy programs before placing an order. Further headwinds may arise in the form of a (re-)introduction of EU tariffs on Chinese solar modules which is currently being discussed in Brussels. Such measures would make modules more expensive, thus less attractive for businesses and homeowners to install, which obviously would also impact the demand for inverters, storage and other products offered by SMA Solar. General pressure financial pressure, especially on consumers and small businesses, due to persisting inflation might also prompt potential customers to consider cheaper alternatives to the company's premium products.

Given all this, investors should expect 2024 profits to be materially lower than 2023. SMA Solar currently generates a decent net profit margin of 13.4 percent. My assumption is, that, going forward, this figure will probably be a good deal lower given the more challenging environment (rising personnel cost, persisting inflation, price pressure, etc.). Somewhere around 10 percent would be a reasonable expectation, I believe. Based on the existing backlog and the pace of new orders, I would expect 2024 revenue in the vicinity of around €1.6 billion. To be on the safe side, I will not rule out a stronger decline in margin and/or revenue. A 10 percent margin of safety may be prudent in that regard.

There are currently 34,700,000 shares outstanding. I do not see any reason to expect share buybacks at the moment. The healthy balance sheet, meanwhile, strongly suggests that there will be no need for capital increases either. So based on my assumptions regarding the development of revenue and net profit margins, I expect 2024 earnings per share somewhere between roughly €4 and €4.5 to be realistic. Based on the current share price, that would value the company at around 12 to 13.25 times forward earnings. That is a reasonable, albeit not a really cheap valuation, in my opinion. Taking into account a strong reputation for quality, the healthy balance sheet and SMA Solar's strategic importance as one of only a few European players in a largely Asian-dominated market, these kinds of multiples are more or less fair in my opinion. I do, however, believe that there is a certain risk of earnings deteriorating even further, if inflation persists and the political environment (think: subsidies for solar installations) remains challenging.

Conclusion

All in all, I am not fully convinced of the merits of an investment in SMA Solar. The company has a strong balance sheet and 2023 is all but certain to end up being the most successful year in its history. 2024, on the other hand, while not on track to become a catastrophe, will most likely be considerably more challenging. The stock is no longer valued at the lofty levels it traded at back in the summer. But it is not yet a screaming buy either. I currently view the stock as more of a Hold. For the time being, I will take a wait-and-see approach. Depending on where it may build a bottom, I may revisit my thesis in the future. Absent better-than-expected order intake, single-digit earnings multiples are what I am looking for in that regard.

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