S92 - SMA Solar

[kab60]

Just wanted to open a thread on SMA Solar.

 

It's a German solar company and the leading producer of solar inverters (15 pct marketshare volume, 20 pct marketshare revenue) that are used to transform direct current from solar (PV) panels into alternate current that is feeded into the grid. SMA used to be mightily profitable due to a booming solar market in Germany but the government changed the feed-in tariff and profits plunged because more than 40 percent of SMA's revenues were generated in their home marked.

 

Since then other markets - espescially the US, China but also the UK, South Africa, Brazil, Chile - has started to boom, but SMA Solar has been caught on the wrong foot with way too high fixed costs and a brand new factory while revenues have more than halved. Good news is that the company is free of debt, has a net cash position of 225m euro (half of market cap) and already announced laying of around 1500 employees so that the fixed cost base is reduced to 245m euro from 407m euro so they'll be able to break even on 700m revenue (FY2014=805M).

 

It's a turnaround story and not guaranteed to succeed but apart from the favorable financial condition one of the biggest Danish companies, Danfoss, bought 20 percent of the equity in a private placement in the fall of 2014 at a share price that was three times higher than the current. Danfoss has a two year lockup period on the shares and transferred Danfoss' own interverter business (which wasn't profitable in recent years) into SMA Solar. Not much has emerged since Danfoss bought into the company - other than SMA laying off it's CFO - but according to SMA Solar they already see some benefits from the Danfoss-partnerskib because they're able to source cheaper.

 

SMA targets an EBIT of minus 30-60m euro in 2015 which I don't think is too bad considering the high price when sacking German employees, so unless they're very convervative (which SMA wasn't in the past, but that might have changed with Danfoss onboard - Danfoss' CEO is old McKinsey) there'll be some cash burn/writedowns this year.

 

Generally, solar energy (PV) is experiencing immense tailwins because cheap Chinese panels have reduced the price more than 80 percent during the last 5 years or so, but just like Airlines experienced massive growh (while stockholders suffered), so far the solar industry hasn't been a good place for stockholders. The reason I think SMA might be different is that while solar panels are a commodity, solar inverters are more complicated to manufacture because every country has it's own grid codes that define how solar panels/wind turbiens etc should interact with the grid. SMA, for an example, is the only company allowed to supply to Japan I believe and historically the company has invested a huge sum of money into R&D.

 

As more and more renewables are integrated into the grid, grid owners are enforcing stricter gridcodes and capabilities (so that for an example a PV setup can be turned off remotely if the grid is oversupplied).  That being said, even though volumes are expected to grow SMA expect declining revenues in euro terms until 2017, so they're not getting fat quickly.

 

SMA bought a Chinese manufacturer a couple of years ago, Zeversolar, but just like Western wind turbine OEMS are struggling in China so is Zeversolar/SMA because the Chinese government decided that they wan't to help the Chinese companies, so I wouldn't expect anything good out of China even though it's the biggest market in the world. On the other hand, Chinese suppliers have mostly stayed at home (like with wind turbines) because the Chinese market in itself is huge and because it seems there are pretty strict barriers to entry (due to aforementioned grid codes).

 

It's tough to come up with a valuation because historic EBIT-margins of 15-27 percent might not come back but I figure the downside is pretty well protected with the net cash position and the company trading below book value. I don't think it'll get to a takeover - I don't think SMA/Danfoss would allow it - but there was a bit of M&A activity in the sector a couple of years ago with conglomerate ABB buying inverter manufacturer Power-One.

 

There's a decent presentation here: http://www.sma.de/fileadmin/content/global/Investor_Relations/Documents/Praesentationen/2015/2015-03-26_SMA_Analyst_Presentation_web.pdf

 

A couple of bullets from the presentation:

 

- The solar market is highly concentrated. The top 5 players account for 53% of the global market in 2014 .

 

- SMA is the only specialized PV manufacturer with a complete product portfolio, global reach and high innovation rate.

 

- Many competitors with a regional focus and limited product offering exited the market already or are about to exit (e.g. Advanced Energy, Solarmax, Sunways, Siemens, Satcon)

 

Disclosure: Long SMA Solar

[gfp]

Thanks for the thread.  I have one SMA Sunny Boy inverter and several Aurora (power one / abb) inverters and I know that in my market the Aurora inverters are much cheaper - so they end up with a much higher market share anytime the installer is specifying (leases and most purchases).  The SMA inverter allows me to use the PV energy when the grid is down, while the Aurora inverters do not.  They definitely look more expensive as well.

 

 

[kab60]

Thanks for the thread.  I have one SMA Sunny Boy inverter and several Aurora (power one / abb) inverters and I know that in my market the Aurora inverters are much cheaper - so they end up with a much higher market share anytime the installer is specifying (leases and most purchases).  The SMA inverter allows me to use the PV energy when the grid is down, while the Aurora inverters do not.  They definitely look more expensive as well.

 

Thanks for the reply. I believe SMA lost one their deals with a big supplier of PV panels in the US to ABB/Power One so their inverters might be too expensive as is. When you look at their product catalog I believe you'll know why - they supply a lot of different inverters in different sizes and shapes to all markets across the globe. According to a company presentation they still want to maintain their position as the only global supplier/the only supplier that can supply to any PV-system, but they working towards a new setup whereby their inverters are "modulized" so that the main components across the different product categories are the same whereas more advanced features  (remotely controlled, storage etc) and local grid code features are added ontop. Seems to make a lot of sense because they'll be able to target very price sensitive customers and customers with more specific demands but obviously execution is key and to be honest I don't know enough about management. They've promised too much in the past but Danfoss' ownership is probably what makes me pretty comfortable plus I think them sacking the CFO and +1500 employess signals they'll do what's necessary to turn the business around. They've been awarded a bunch of awards in Germany in the past, like best engineering workplace, so they might've become too full of themselves. Hopefully reality - and Danfoss - has kicked in.

 

If anybody knows wind turbine manufacturer Vestas, I think (and hope) some of the same dynamics might be in place. It too experienced a massive slowdown and bordered on bankruptcy (unlike SMA with it's big net cash and no debt) but three years later it sports impressive numbers because the fixed cost base has been reduced dramatically. That's absolutely crucial in a market where you're dependent on public funding (like with solar) and where markets go boom and bust in cycles. That's another reason I think it makes sense for SMA to stay truly global - that way they'll be busy even when one market closes down for a periode of time. Hopefully, in not too long, solar will be competitive even without funding. Some places, like with wind, that's already the case.

[peter1234]

I had looked at them a few years ago, so this might not be current.

 

As far as I remember, in the past their inverters had higher efficiency than the competitors, meaning that they converted the sun light to more power.

 

Over time, the competition caught up and the small difference in efficiency did not justify higher prices anymore.

 

Also the founders all retired near the top of the cycle.

 

They were controlled by a foundation set up by the founders, so a takeover might be hard.

 

[frommi]

From what i know of this industry is that most of their earnings will be needed for research and new factories to produce the current state of the art panels, because nobody buys the panels that are two years old. I don`t think its a good business to own, maybe at a discount to NCAV.

[kab60]

In the past their inverters had higher efficiency than the competitor, meaning that they converted the sun to more power. Over time, the competition caught up and the small difference in efficiency did not justify higher prices anymore. The founders all retired near the top of the cycle.

Thanks for the input. The founder and chairman to his death, Günther Cramer, died in february 2015. Company was IPO'ed in 2008 and I'm not sure of the ownership stakes since then but it was/is my impression that the founders still own the majority of the equity. Do you know otherwise?

[peter1234]

In the past their inverters had higher efficiency than the competitor, meaning that they converted the sun to more power. Over time, the competition caught up and the small difference in efficiency did not justify higher prices anymore. The founders all retired near the top of the cycle.

Thanks for the input. The founder and chairman to his death, Günther Cramer, died in february 2015. Company was IPO'ed in 2008 and I'm not sure of the ownership stakes since then but it was/is my impression that the founders still own the majority of the equity. Do you know otherwise?

 

As I understand it:

25% free float

29.75% foundation set up by founders

25.2% Pooling agreement (children of founders) until Oct 2017

20% Danfoss

 

From the 2014 AR (see pages 17 and 25).

 

 

 

[kab60]

From what i know of this industry is that most of their earnings will be needed for research and new factories to produce the current state of the art panels, because nobody buys the panels that are two years old. I don`t think its a good business to own, maybe at a discount to NCAV.

I agree but SMA Solar doesn't produce the panels. They produce the inverters that transform the electricity generated in the panels from direct current to alternate current which is feeded to the grid. It's a more complicated component because it has to comply with local grid codes/regulation whereas production of panels seems to be all about scale. Obviously scale is important for the inverter business as well but SMA is actually the #1 supplier. They've been caught with too high costs after the German market almost went bust from one year to the other so I think the solution/key to the turnaround is pretty simple. They'll have to reduce fixed costs and get a flexible setup that is able to scale up and down according to demand. Big question is how profitable the business/sector will be going forward but a couple of players have already left the market and I believe there hasn't been many/if any new entrants in recent years (I seem to recall that from a presentation.

[frommi]

I agree but SMA Solar doesn't produce the panels. They produce the inverters that transform the electricity generated in the panels from direct current to alternate current which is feeded to the grid. It's a more complicated component because it has to comply with local grid codes/regulation whereas production of panels seems to be all about scale. Obviously scale is important for the inverter business as well but SMA is actually the #1 supplier. They've been caught with too high costs after the German market almost went bust from one year to the other so I think the solution/key to the turnaround is pretty simple. They'll have to reduce fixed costs and get a flexible setup that is able to scale up and down according to demand. Big question is how profitable the business/sector will be going forward but a couple of players have already left the market and I believe there hasn't been many/if any new entrants in recent years (I seem to recall that from a presentation.

 

Sorry, forget my comment. I should have known better. :)

[kab60]

In the past their inverters had higher efficiency than the competitor, meaning that they converted the sun to more power. Over time, the competition caught up and the small difference in efficiency did not justify higher prices anymore. The founders all retired near the top of the cycle.

Thanks for the input. The founder and chairman to his death, Günther Cramer, died in february 2015. Company was IPO'ed in 2008 and I'm not sure of the ownership stakes since then but it was/is my impression that the founders still own the majority of the equity. Do you know otherwise?

 

As I understand it:

25% free float

29.75% foundation set up by founders

25.2% Pooling agreement (children of founders) until Oct 2017

20% Danfoss

 

From the 2014 AR (see pages 17 and 25).

 

Thanks. Seems like they're in it for the long haul and if not, they'll want to get things fixed either way. I'm not so worried about a turnaround since reducing fixed costs isn't the most demanding task in the world - it's more a question of whether or not it's a good business to be in. Players exiting the scene signals that it isn't but that is exactly what might be needed for it to become (a good business).

[kab60]

Q1 results came out yesterday. Seems like they are on target so far. Market liked it, stock up 11 pct.

 

13.4m ebitda and their layoffs of 1600 people apparently wont really be felt before H2. Q1 revenue and backlog already gets them more than halfway to FY2015 revenue target.

 

http://www.sma.de/en/investor-relations/corporate-news/details/news/13294-sma-solar-technology-ag-posts-significant-sales-growth-and-improves-operating-earnings-in-firs.html

[kab60]

Consolidation continues, top 4 had 73,6 percent of the market share in Q1 which grew 37,5 percent YoY to the fourth largest quarter for inverter shipments. http://www.pv-magazine.com/news/details/beitrag/ihs--record-q1-for-inverter-shipments-_100019540/#axzz3aqWxgl1B

 

"IHS was positive in its appraisal of SMA’s performance in Q1, describing it as “outstanding” and noting that SMA has clawed back some market share."

 

 

[kab60]

SMA announced a partnership with Siemens today. Popped 25 percent. Up to 22 euro from 13,5 euro in a month. Marketwise Solar seems to have a lot going for it at the moment.

[peter1234]

Nice pick.

:)

[kab60]

Not sure anyone cares (except me) but they raised guidance after marker close. Expect EBIT of minus 25 to 0m euro vs minus 30 to minus 60m. Revenue higher as well.

[kab60]

I'm out. Stock took off - probably due to shorts covering. Gone from 12 to 30,5 euro in a bit more than three months so suddenly downside has increased dramatically.

[peter1234]

I'm out. Stock took off - probably due to shorts covering. Gone from 12 to 30,5 euro in a bit more than three months so suddenly downside has increased dramatically.

Nice compounding.

:)

[kab60]

I'm out. Stock took off - probably due to shorts covering. Gone from 12 to 30,5 euro in a bit more than three months so suddenly downside has increased dramatically.

Nice compounding.

:)

Thanks. I'm not good with percentages but I figure the IRR has been pretty good. If only there were more like these. :)

[kab60]

I'm back in. Stock sold off after lower quidance. They expect 60-70m Ebit vs EV around 400m (350m net cash). But Ebit understates earnings due to high DA vs capex (they overinvested in prior years). DA is around 65m this year vs capex of 25-30m.

 

Last time I owned it, it went from 11,5 to 55 in notime (i sold in low 30ties). This is a bit more pricey, but I get around a 20 pct earnings yield this year. Downside should be protected long term by the owners (Danfoss bought 20% in the 40ties and SMA work together with Siemens for whom it would be a bitesize acquisition). Risk is US market getting crushed (but they even managed when they lost the German market earlier on) or them wasting cash, but I think wasting cash is unlikely due to the ownership.

 

[investor1]

I'd be careful about the underlying business here. The majority of SMA's profit is from the utility segment, which largely sells a central inverter product for utility scale PV arrays (think of a box the size of a SmartCar). The utility solar market is moving towards lighter, modular string inverters, because they are i) easier to install and replace (only 100 lbs), ii) can better optimize energy output from the panel arrays, and iii) convert to AC power closer to the panel, allowing installers to use lower cost, mass-produced components (AC is the grid standard). The historical advantage of the central inverter was scale and lower cost, but now some competitors, Huawei in particular, have the scale to produce cost-competitive string inverters. Huawei usurped SMA as the global #1 inverter company by volume in 2015, with no sales in the U.S. Huawei is just now pushing into U.S. utility solar, arguably SMA-Utility's most important market.

 

As mentioned above, SMA has a great brand name, cash position, and ownership profile, but if the market continues to play out as it has with an aggressive Chinese competitor and a move towards string inverters, SMA's performance will continue to suffer and 2017 will not look so hot.

[kab60]

Great points and insights. I don't expect 2017 to look hot, frankly I really don't know how it'll look. And I can't point out who'll be the technological leader, but so far they seem to have held their own. People have been fearful of Chinese players in the wind market as well, but the domestic Chinese market is so huge, that most stay at home. These things are easier to ship, so this might be different, we'll see. There's lots of unknowns. It's still an immature industry with boom/bust cycles, potential irrational pricing from Chinese players etc. etc., but I kinda like the odds since there's secular growth, prices of PV panels are plunging, and these guys have spent a fortune (sunk costs) on R&D and production facilities. The recent announcement of their closure in the US indicates there's still fat to cut. In the end I think it'll end up being a part of ABB or Siemens, and until then I expect results to fluctuate wildly. I made it a decent sized position but with room to add another chunk, cause there's low volume and lots of volatility.

[investor1]

Some reading on Huawei's push into U.S. utility solar market:

 

http://www.pv-tech.org/editors-blog/huawei-readies-major-push-in-us-pv-inverter-market

 

Huawei had a huge booth at Intersolar 2016 (compared to no presence last year). The full effect of this effort will show up in 2017.

 

I agree there's a good chance SMA pursues a sale sooner rather than later given its cash, tech value (?), and its unfavorable competitive outlook. Buying SMA is a bet that a take-out happens before competitive pressures lower EBIT further.

[kab60]

I'm not really sure about that. I get around 75m owner earnings this year vs. 400m EV Earnings could be half next year and it probabaly still wouldn't look too bad (they did 100m cf so far this year). Two points; SMA also sells string inverters. Developers like competiton. I think this can get very volatile, and results will be lumpy, but I'm okay with that.

[rkluwer]

The thing with SMA and the way the do thing, is a bit more expensive then others. But there pV's er more reliable and holds a lot more features then those from chinese manufactures. if u read Sma reports, u will see that the chinese standards are behind those of SMA and that SMA also plays in other fields, that should bring rev Down the road. Here i think about the storerage for solar systems and smart intergration. SMA also talks about international standards which not all chinese produceres are following.

The are frontrunners on pv's and even tough china can produce cheap, the don't make the same quaility and high tech, that SMA stands for. Down the road maybe the will, but with over 700 patens, im sure SMA have there most valuable assets covered.

 

If trump put a toll on chinese goods to US, SMA might even benefit from this, as all the chinese dumping prices, this wont be enough. Even with Trump being anti green, i don't think he can escape solar, and solar might even get better options, as Mr. Trump hates windmills and might agree to put more solar panels up(instead of windmills), as the don't distrub his views :)

[rkluwer]

Big turning point for Solar RE:

 

https://www.bloomberg.com/news/articles/2016-12-15/world-energy-hits-a-turning-point-solar-that-s-cheaper-than-wind

 

A transformation is happening in global energy markets that’s worth noting as 2016 comes to an end: Solar power, for the first time, is becoming the cheapest form of new electricity.

 

This has happened in isolated projects in the past: an especially competitive auction in the Middle East, for example, resulting in record-cheap solar costs. But now unsubsidized solar is beginning to outcompete coal and natural gas on a larger scale, and notably, new solar projects in emerging markets are costing less to build than wind projects, according to fresh data from Bloomberg New Energy Finance.

 

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SMA has just been annouced as the best/top provider of inverters for the 5 year in a row. So with solar becomming cheaper then most of the ordinary gas, coal etc. This shows a very positive future.