Entering 2014 in better shape
While Q4 revenue performance was muted, improved margin performance suggests that we now seeing the back of the troubles that hit Q2 and Q3. Investment in new products and the progressive transitioning of the business to a more product-driven model give scope for margin expansion substantially beyond our forecast level. Thus we feel the shares remain interesting for those with a recovery remit.
Muted revenues in Q4, but margins improved
Psi Group's (PSIG.OL) revenue performance remained muted in Q4 with sales down by 12.8% y-o-y at €47.2m, meaning that FY full year revenues at €176.3m were below our €184.1m estimate. Within this context, profitability performance improved markedly on Q2 and Q3, with Q4 contributing €3.4m of the FY €4.2m full year operating result, although still below our €4.9m estimate. A hefty €2.7m tax charge (see p2) meant that adjusted EPS at 10.6c was 44% below our 19.2c estimate.
2013’s investment should improve returns in 2014
Notwithstanding the weakness in the German energy market, the significant margin compression witnessed in 2013 stemmed largely from the combination of execution issues and accelerated product investment, aimed at opening up new opportunities in the future. We believe that action has been taken to reduce execution risk in particular; integration contracts are wherever possible now being structured on a time and materials basis rather than fixed price. Investment in accelerating product development in the fields of rail energy and logistics transport management systems, along with the longstanding investment in product to manage the complexities of renewable energy feed-in will hopefully translate into new customer orders over the course of 2014 as well.
Valuation: Remains an interesting recovery play
Our estimate changes are shown on page 4. While our sales estimates have been reduced slightly (3% in 2014) our profitability estimates are essentially unchanged. This reflects the improved margin performance in Q4 and initiatives to improve profitability, perhaps at the expense of some top-line growth. Nevertheless, operating margin should have scope to expand substantially above our forecast level (6.2% for 2014 and 7.5% for 2015), potentially to the mid-teens level if efficiency initiatives work well. So while the shares remain valued on recovery multiples (2015 EV/sales 1x, P/E 19.1x), given the scope for margin expansion, we feel that the shares remain a very interesting proposition for investors with a recovery remit.
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