What's the idea?
- The ongoing energy transition and sustainable development policies will drive global investments in renewable energy, with a significant portion dedicated to solar energy in the coming years. According to IEA forecasts, installed PV capacities are expected to increase 2.3 times by 2027.
- SMA Solar Technology is the leading European producer of PV inverters and second globally after Chinese manufacturers.
- The company stands out due to its widely diversified and integrated portfolio of products and services that complement each other, creating added value for customers.
- SMA Solar Technology’s management prioritizes customer needs, technological leadership, and enhancing profitability, laying the foundation for further growth and expansion into new markets.
- Favorable macro conditions and strategic management actions have led to record-breaking results in H1 2023. Forecasts for FY2023 have been revised upward.
About Company
SMA Solar Technology AG (S92) is a German solar energy technology company, engaged in the development and manufacture of PV inverters, power storage systems, EV charging stations, energy management systems, and providing a range of associated digital solutions and energy market integration services. The company’s client base includes individual customers and large industrial and utilities companies operating PV farms worldwide. SMA Solar Technology has manufacturing facilities and offices in 20 countries. The company was founded in 1981 and is headquartered in Niestetal, Germany.
Why do we like SMA Solar Technology AG?
Reason 1. Solar energy sector is poised for exponential growth in short term
SMA Solar Technology’s core business involves the development and manufacture of PV inverters, battery-storage systems, charging stations for electric vehicles, and energy management systems. In addition, the company offers a comprehensive range of related software solutions and services that enable more efficient management of PV energy systems. In 2018, SMA Solar Technology launched a new hydrogen business segment with the focus on electrolysers for power-to-gas applications.
SMA Solar Technology’s business is divided into three customer segments:
- Home Solutions caters to global markets for private PV systems with and without storage systems and connections to smart home solutions featuring all the hardware, software and service components required for an independent and cost-effective energy management.
- Commercial & Industrial Solutions serves global markets for commercial PV systems offering commercial enterprises and the real estate industry energy management, battery storage and electric vehicle charging solutions.
- Large Scale & Project Solutions focuses on international PV power plant markets with complete solutions that perform optimal grid service and monitoring functions, storage solutions for large-scale PV and storage power plants, as well as technology services such as PV power plants modernization and O&M services. Solutions for optimized hydrogen production complete the segment’s portfolio.
In 2022, the Large Scale business earned €440.6 million of revenue, accounting for 41.4% of the total revenue for the reporting period. The second largest segment by revenue was Home Solutions, with €335.0 million (31.4%), followed by the C&I segment which contributed €290.3 million (27.2%). From the geographical perspective, SMA Solar Technology's core business is concentrated in Europe, Middle East, and Africa (EMEA) which account for 63.4% of the company’s revenue. The revenue share of the North and South America region makes up 23.9%.
Revenue breakdown by business and geographical area
The perspectives of solar PV are highly positive and promising, with the sector experiencing dynamic growth driven by an array of factors. These factors include the ongoing energy transition, the commitment of many countries to sustainable development goals and net-zero emissions policy, as well as the EU plans to reduce dependency on imported fossil fuels while enhancing energy security, etc. A collective drive towards a greener and more sustainable energy is propelling the rapid expansion of the solar PV sector.
Investments in renewable energy have been consistently growing at a rapid pace. According to IRENA, total green investments increased by 52%, rising from $328 billion to $499 billion in 2019–2022. Notably, a significant portion of these investments have been directed towards solar PV that accounted for 60% of the total investments in 2022. In absolute figures, solar PV investments reached $298 billion in 2022, surging 2.3 times since 2019 when they stood at $127 billion.
Annual financial commitments in renewable energy by technology
IEA forecasts that solar PV’s share in the total installed power capacity will increase from 12.8% in 2022 to 22.2% in 2027. Therefore, it is poised to surpass the power capacity run on coal and natural gas by 2027, although solar PV is still expected to lag behind hydrocarbons in terms of actual electricity generation volumes. According to IEA's baseline forecast, renewable energy capacity is expected to expand by almost 2,383 GW in 2022–2027, which is nearly equivalent to the increase over the previous two decades (renewable capacity increased by 2,409 GW in 2001–2021). As for solar PV, its capacity expansion will account for about 1,500 GW.
Share of cumulative power capacity by technology
According to SMA Solar Technology's own forecasts, the global market for its portfolio products is projected to double by 2026, reaching €46.0 billion. The rapid growth of solar PV is driven not only by technological advancements that allowed to cut the levelized cost of electricity (LCOE) for utility-scale PV energy generation by 16.7 times (without subsidies) since 2009, but also by legislative initiatives such as the European REpowerEU Plan and the US Inflation Reduction Act. These factors collectively contribute to the thriving expansion of the solar PV sector.
PV equipment market outlook by sector
Therefore, it can be expected that SMA Solar Technology, being one of the industry leaders with a market share around 5.0%–6.0%, will capitalize on the developments and seize an opportunity to reinforce its positions in core segments and expand into new markets.
Reason 2. Sustainable business model lays foundation for further growth
Over the past 15 years, the solar energy industry has gone through several development stages, experiencing booms, downturns, and consolidation. The SMA Solar Technology management has not only managed to keep the company afloat but also transformed it into an industry leader. Currently, the company has a sustainable and diversified business model which is based on a set of key principles:
- Integrated and comprehensive portfolio. While SMA Solar Technology had focused solely on inverter manufacturing up to the late 2000s, the company’s business has currently become more integrated and diversified, encompassing almost the whole value chain in PV energy business, from developing and manufacturing PV inverters and storage power systems to providing energy management solutions and various technology services.
- The company’s technological solutions including an array of digital applications create an added value for customers, since they allow to integrate separate energy system components (PV modules, optimizers, inverters, battery-storage systems, etc.) into a coherent and sophisticated ecosystem, managed from a single center.
- Customer-centric approach. SMA Solar Technology is present in all customer segments (Home, C&I, Large Scale), offering customers a full range of products and services that cover as many functions as possible. This all-in-one solution model fosters long-term relationships with customers and their loyalty to the brand, which in the long run enhances customer lifecycle and improves customer retention rates.
Strategic fields of action by segment
Adherence to technological leadership. As of December 31, 2022, SMA Solar Technology held 1,729 patents and the rights to 1,450 trademarks, with more than 500 other patent applications still pending. The company's research and development (R&D) expenses are growing annually, accounting for approximately 8.1% of its revenue. In product development, SMA Solar Technology pursues a platform strategy that implies standardization of the core components’ architecture, increasing the proportion of identical components across the entire portfolio while also reducing their number in the system. It allows the firm to quickly respond to market changes and systematically reduce production costs.
Such a sustainable business model and streamlined production processes are aimed at improving margins and creating new opportunities for further expansion. SMA Solar Technology plans to commission a new PV inverter factory, which will double the company’s production capacity to 40 GW by 2025. The construction commenced in April 2023. The factory’s product line will primarily focus on large-scale customers’ needs since this market seems to be the most promising. According to the company's estimates, large-scale PV power plants market is projected to grow by 30% annually to reach €17.3 billion by 2026 (compared to €6.1 billion in 2022). Furthermore, the economies of scale will enable SMA Solar Technology to optimize supply chains and reduce operational costs per unit.
PV inverter production capacity and sales
Additionally, the company’s management is considering an investment into another PV inverter factory in the US, as the US Inflation Reduction ACT offers renewable energy companies substantial subsidies, which makes such investment very attractive and profitable.
Hydrogen is another promising renewable energy sector, in which SMA Solar Technology is engaged. In this area, SMA Solar Technology has created several partnerships and executed around 50 projects in 2020–2022, delivering more than 500 MW capacity. In 2023–2024, the management intends to increase the hydrogen power generation capacity to 1GW.
Thus, SMA Solar Technology focuses on strengthening its core PV business while also developing new segments. However, this implies that future growth will be inevitably accompanied by increased capital expenditures and R&D expenses, which could put the company's cash flows under pressure. Moreover, as production capacity expands, the management will need to address the problem of filling free capacity that stood at 42% in 2022. This might require a surge in selling expenses to boost marketing campaigns and enhance brand awareness.
Reason 3. Favorable market conditions contribute to outperformance
Despite the overall 2023 economic uncertainty worldwide, particularly in Europe, the favorable solar PV market conditions, namely strong demand and high prices, supply chains improvements, etc., have contributed to SMA Solar Technology’s robust production and financial performance in H1 2023:
- PV equipment sales grew by 25%, reaching 7.2 GW compared to 5.8 GW in H1 2022.
- Revenue increased by 65% to €779 million YoY, while revenue for FY 2022 was only €1.1 billion.
- EBITDA surged by 7.8 times, from €16 million to €125 million YoY.
- Cash flow from operations increased from € -14 million to €113 million YoY, FCF skyrocketed from € -42 million to €81 million YoY.
- Gross margin increased from 19.5% to 29.0% YoY, while EBITDA margin grew from 2.7% to 15.3% YoY.
In H1 2023, the Home Solutions segment was the main revenue driver, with households’ demand surging by almost 2.5 times compared to H1 2022.
Sales by segment in H1 2022 vs H1 2023
As of 30 June 2023, the company’s order backlog decreased slightly by 0.6% compared to the previous quarter, but nevertheless it remains at record-high levels over the past several years, totaling €2.45 billion.
Order backlog dynamics
Despite first signs of demand stagnation, the SMA Solar Technology management anticipates that the favorable market conditions will persist in the following months of 2023. Material supplies from the supplier side are expected to improve faster, thereby increasing utilization of production capacity and boosting sales across all segments. This prompted the company to revise its earlier FY 2023 forecast for higher targets:
- Revenue target was raised from the range of €1.45–€1.60 billion to €1.70–€1.85 billion.
- EBITDA target was set at €230–€270 million, up from €135–€175 million.
Thus, SMA Solar Technology has strong fundamentals to achieve record-high results in 2023, which would increase the company’s stock value.
Financial performance
SMA Solar Technology’s financial results in 2022 be summarized as follows:
- Revenue increased from €983.4 million in 2021 to €1.1 billion in 2022.
- Gross profit rose from €170.2 million to €218.6 million YoY.
- In 2022, the company returned to operational profitability, reporting an operational profit of €6.5 million compared to an operational loss of €10.8 million in 2021.
- Net income constituted €55.8 million in 2022 versus a net loss of €23.2 million a year earlier.
Operating cash flow decreased from €94.3 million to €28.7 million YoY. The main reason for this downtrend is the usage of extra provisions (warranties, personnel and other provisions).
FCF also declined from €76.7 million in 2021 to €2.8 million in 2022. This was due to changes in operating cash flow and an increase in capital expenditures by 47%, amounting to €25.9 million.
The key factors contributing to better performance included healthier demand from households and commercial enterprises, higher selling prices, and faster improvements in material supplies from the vendors.
Dynamics of annual financial results
Dynamics of annual financial results
SMA Solar Technology’s financial results in H1 2023 is presented below:
- Revenue increased from €471.8 million to €778.9 million YoY.
- Gross profit also grew from €93.2 million to €232.5 million YoY.
- Operating profit demonstrated positive dynamics and amounted to €108.3 million versus operating loss of €3.7 million a year earlier.
- Net profit surged to €103.5 million in H1 2023, compared to net loss of €10.6 million in H1 2022.
Overall, SMA Solar Technology continues to demonstrate strong financial results in 2023 due to favorable market conditions and the management's strategy aimed at enhancing profitability.
Dynamics of half-year financial results
SMA Solar Technology maintains a robust balance sheet, with total financial debt being at extremely low levels:
The leverage ratio, defined as the ratio of total debt to assets, stands at 2%, which is significantly lower than the PV inverter manufacturers average of 26%–37%.
As of June 30, 2023, total debt stood at €29.6 million. Given €298.6 million of cash and cash equivalents on the balance sheet, the company's net debt is negative, accounting for €-269.0 million.
Annual interest expenses are insignificant. However, due to operational loss in 2019–2021, the company had a negative interest coverage ratio. Following the company’s return to operational profitability, the interest coverage ratio stood at 1.1x in 2022 and 50.4x in H1 2023.
Cash flow from operations fluctuates from year to year, but over the last three years its average value stood at around €30 million.
Stock valuation
SMA Solar Technology trades lower than other PV inverter manufacturers on the average multiples: EV/Sales — 1.65x, EV/EBITDA — 14.59x, P/FFO — 16.45x, P/E — 15.07x. However, SMA Solar Technology demonstrates greater resilience to macroeconomic turbulence, and owns an integrated and diversified product portfolio. Moreover, the company already outperformed in H1 2023 and raised its FY 2023 targets, and therefore, offers the best return per unit of risk taken.
Comparable valuation
The minimum price target set by TD Cowen is €81 per share, while Metzler Global Equities values SMA Solar Technology at €120 per share. According to the Wall Street consensus, the stock’s fair market value stands at about €113, implying a 48.4% upside potential.
Price targets of investment banks
Key risks
- Severe competition in the PV solar sector driven by favorable market conditions and government subsidies stimulates major players to resort to price dumping in order to squeeze out smaller companies. In 2022, SMA Solar Technology's PV inverter market share decreased due to the aggressive expansion of Chinese competitors.
- With the PV energy companies outperforming and increasing their margins, governments can revise their policies and reduce financial support and subsidies for the renewable energy industry.
- Political and regulatory risks related to the rise of protectionism that favors national companies and hampers international trade.
- Deteriorating macroeconomic conditions and risks of recession may provoke a decline in green investments, affecting order volumes. Despite the strong H1 2023 performance, SMA Solar Technology's stock fell by 9.8% following the release of the company’s interim report, as investors were disappointed by a slight decline in order backlog.
- Technological companies have to always invest in R&D otherwise they risk lagging behind industry leaders, which would lead to losing market share in the long run.