Leading Industrial IT set for growth

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1 PSI AG 1 June 2016 quirin bank Equity Research Leading Industrial IT set for growth Rating Buy Share price (EUR) Target price (EUR) Bloomberg Sector Share data PSAN GY Software Shares out (m) 15.7 Daily volume shs (m) 0.1 Free float (%) 43.6 Market cap (EUR m) 206 EV (EUR m) 212 Dividend/Share (EUR) 0.21 Dividend yield (%) 1.7 Payout ratio (%) 46.4 Performance ytd (%) months (%) months rel. (%) 17.8 Index Share price performance TecDAX PSI will show recovered earnings in FY 16. We expect a new mild growth trend to be established. This strategic shift from upstream to downstream industry segments should support this trend. We expect a less volatile corporate development due to the strategic shift from project related businesses towards more stable upgrade and maintenance contracts. While the profitability is still somewhat diluted due to investments in the technology platform we use a DCF model to value PSI. Due to the expected rising operating margins in the upcoming years we get to an fair value of around EUR which offers an upside of close to 20% Strong book to bill in Q1/16 PSI showed a strong order intake in Q1/16 +13% to EUR 70m. The book to bill ratio reached a record level of 1.6. Q1/16 sales declined by 1% to EUR 42.6m due to adjustments in the SEA business. As expected EBIT recovered by 25% to EUR 2.2m after the weak Q1/15. PSI: 1Q/16E sales & EBIT EUR m 1Q-15 1Q-16E yoy chg. Sales % EBIT % EBIT margin 4.0% 5.1% +110bps Source: company data, quirin bank estimates.. FY16 to be a business year with a strong recovery of earnings. We expect total PSI group sales to rise by 6.2% to EUR 195m. Due to the improved operational performance EBIT will rise by 19.4% to EUR 13.3m. Therefore the EBIT margin will improve by 80 BP to 6.8%. Based on the business concept the operational performance will improve sequentially over the next quarters with Q4/16 to be the strongest quarter in the FY. We expect all business units to contribute with positive results. Higher overall margins are also supported by the non-recurrence of startup costs of some SEA projects. Given that PSI still runs huge investments in order to bring the different software technologies platforms in the group into one single platform EBIT margins are still diluted by more than 100 BP. PSI applies a very conservative accounting policy. Therefore only small parts of the investments are capitalized. Due to the improved financial structure we expect PSI to continue its dividend policy. The expected payout ratio of around 50% in the last two years might lead to a dividend payment of EUR 0.25 per share. This equals to a dividend yield based on current stock prices of 1.9%. Key figures e 2017e 2018e Source: Bloomberg Next triggers 2 June quirin champions conference 27 July H1 Report Analysts Klaus Soer Financial Analyst T +49 (0) klaus.soer@quirinbank.de Harald Eggeling Financial Analyst T +49 (0) harald.eggeling@quirinbank.de Felix Lutz Financial Analyst T +49 (0) felix.lutz@quirinbank.de Please see final page for important disclaimers and disclosures Sales EUR m EBITDA EUR m EBIT EUR m EPS EUR Sales growth % EBIT growth % EPS growth % n.m EBITDA margin % EBIT margin % Net margin % EV/Sales ratio EV/EBITDA ratio EV/EBIT ratio P/E ratio P/BV ratio Dividend yield % Source: Bloomberg, Company data, quirin bank estimates

2 Strategy to shift operations towards downstream clients The overall strategy of PSI is twofold according to our understanding. Due to low energy prices and a therefore declining orders from the upstream front PSI focusses increasingly its activities to the downstream side. This has already led to higher order volumes in the segments energy management and logistics. In order to reduce the volatility of the business PSI is shifting contracts from a pure project/license driven typ of orders to more upgrade and service/maintenance driven contracts. Those accounted already in FY 15 for around 28% of total sales. We assume that this shift will beside the mentioned common technology platform the major driver to achieve the intended double digit margin level in the long run. PSI might take advantage of Industry 4.0 trends We also see it as major positive that PSI with its product portfolio is well equipped to participate in new industry 4.0 applications. Industrial processes will in future largely be driven from intelligent and big data driven IT technologies. This is to a large extend the core basis for many of the PSI product categories. Valuation Outperformance last 12 month - Valuation leaves upside of close to 20% PSI had a great stock price performance over the last twelve month. The stock outperformed the SDAX by around 20%. This was supported by expected profit recovery after internal and external driven earnings compression. To find a fair valuation for PSI we use 2 different valuation approaches. a) A peer group valuation based on selected peers and competitors within the industrial IT service and process applications industry. b) Due to the current diluted margins (high direct costs to invest/improve the technology base) we use a classical DCF model which anticipates the prospective margin improvements to a much better extend. Peer valuation does not offer a huge upside If we compare PSI on the peer group level, we do not find a significant upside. PSI appreciates a significantly lower (EBIT) margin level than the major peers. At the same time EV/EBIT or EV/EBITDA multiples trade around the peer group level. Obviously the market wants to see an stronger growth and an improving profitability before a premium will be paid. PSI Peer group table Company P/E 16e P/E 17e EV/S 16e EV/S 17e P/B 16e P/B 17e EV/EBITDA 16e EV/EBITDA 17e EV/EBIT 16e EV/EBIT 17e EBIT margin 16e EBIT margin 17e SALES CAGR14-17e GFT TECHNOLOGIES SE (qb est.) 24.4x 20.2x 1.1x 1.0x 2.6x 2.4x 11.6x 10.1x 16.0x 13.2x 6.8% 7.5% 5.8% PSI AG 22.1x 18.9x 0.9x 0.8x 2.6x 2.4x 10.2x 8.6x 13.4x 11.1x 6.9% 7.6% 5.3% INIT INNOVATION IN TRAFFIC S 14.3x 11.9x 1.3x 1.2x 1.8x 1.7x 7.3x 6.7x 9.7x 8.2x 12.6% 13.9% 3.1% BERTRANDT AG 15.1x 13.4x 1.0x 0.9x 2.8x 2.4x 8.3x 7.1x 10.9x 9.4x 9.5% 9.9% 7.5% HONEYWELL INTERNATIONAL INC 17.1x 15.7x 2.3x 2.2x 4.3x 3.9x 11.0x 9.9x 12.5x 11.3x 18.5% 19.1% 4.4% ACCENTURE PLC-CL A 22.3x 20.5x 2.3x 2.2x 11.1x 10.3x 13.5x 12.5x 15.5x 14.2x 14.7% 14.9% 6.1% DASSAULT SYSTEMES SA 28.9x 26.2x 5.5x 5.1x 4.8x 4.3x 15.7x 13.7x 21.0x 17.7x 25.6% 27.1% 8.0% LUXOFT HOLDING INC 24.9x 22.1x 3.1x 2.6x 7.4x 5.3x 16.4x 13.9x 19.5x 17.0x 16.1% 14.6% 22.5% ITRON INC 20.8x 18.3x 1.0x 1.0x 2.3x 2.1x 9.4x 8.2x 16.0x 13.1x 5.9% 6.7% 4.0% CGI GROUP INC - CLASS A 17.6x 16.3x 1.9x 1.9x 2.8x 2.4x 10.0x 9.2x 12.9x 11.7x 14.5% 14.9% 3.5% GENERAL ELECTRIC CO 20.1x 17.3x 2.9x 2.9x 3.3x 3.8x 18.4x 15.7x 23.7x 22.1x 13.1% 13.8% 3.9% SIEMENS AG-REG 14.0x 12.8x 1.3x 1.3x 2.2x 2.1x 10.2x 9.1x 13.7x 12.0x 9.4% 10.2% 3.3% Peer average 19.7x 17.6x 2.1x 2.0x 4.1x 3.7x 11.9x 10.4x 15.4x 13.4x 13.4% 13.9% 6.5% PSAN GY (qb est.) premium (discount) to average 24% 15% -49% -51% -36% -34% -2% -3% 4% -2% -49.1% -46.0% -10.2% Peer median 20.1x 17.3x 1.9x 1.9x 2.8x 2.4x 10.2x 9.2x 13.7x 12.0x 13.1% 13.9% 4.4% PSAN GY (qb est.) premium (discount) to median 21% 17% -43% -47% -5% 0% 13% 10% 16% 10% -48.2% -46.1% 33.0% Std. dev. 4.5x 4.1x 1.3x 1.2x 2.7x 2.3x 3.4x 2.9x 4.2x 3.9x 5.4% 5.4% 5.3% 25th Percentile 16.1x 14.5x 1.1x 1.1x 2.5x 2.2x 9.7x 8.4x 12.7x 11.2x 9.4% 10.1% 3.7% 75th Percentile 22.2x 19.7x 2.6x 2.4x 4.5x 4.1x 14.6x 13.1x 17.8x 15.6x 15.4% 14.9% 6.8% Min 14.0x 11.9x 0.9x 0.8x 1.8x 1.7x 7.3x 6.7x 9.7x 8.2x 5.9% 6.7% 3.1% Max 28.9x 26.2x 5.5x 5.1x 11.1x 10.3x 18.4x 15.7x 23.7x 22.1x 25.6% 27.1% 22.5% Source: quirin Bank estimates, Bloomberg Leading Industrial IT set for growth 2

3 DCF value as the core investment criteria Given the special situation of PSI with a great product portfolio, high investments in the common technology platform and the development of product solutions for upcoming industry 4.0 applications, we think the better advice to value PSI is using a standard DCF model. While anticipating moderate sales growth we have anticipated the underlying EBIT margin to reach the expected double digit level in the terminal value. Realistically we anticipated also lowering underlying capex needs and growing free cash flows which will lead to declining debt levels in the years to come. Finally we get to a DCF fair value of around EUR per share Consequently we set our TP to EUR and initiate the coverage with a BUY Rating Is PSI a takeover target? PSI owns already a very stable shareholder structure characterized by several larger shareholders who in the past were focused on takeover and take out targets. Given the sharp growth potential of PSI and the valuable technology base into upcoming themes like industry 4.0 applications we think the PSI technology might be interesting for international strategic investors like larger integrated industrial groups. Given rising profitability, low investment needs, rising free cash flows and consequently lower debt levels we can also imagine that financial and/or private equity investors might be interested in the company. If and when a potential takeover attempt might happen is naturally hard to assume. In such a case we would view the DCF fair value of EUR per share at the lower end of a potential range. PSI group: Sales and EBIT by Segments 2015 yoy % Q yoy % 2016e yoy % 2017e yoy % 2018e yoy % Energymanagement Sales EBIT EBIT-Margin % Produktionmanagement Sales EBIT EBIT-Margin % Infrastructuremanagement Sales EBIT EBIT-Margin % PSI group: Umsatz EBITDA EBITDA-Marge % Depreciation EBIT EBIT-Marge % Finanzergebnis Ergebnis v. Ertragst Bruttomarge % Steuern Steuerquote % Ergebnis n. Steuern Ergebnis Aktionäre Anzahl Aktien Ergebnis je Aktie Leading Industrial IT set for growth 3

4 Company description PSI is a leading global supplier of process control software solutions for utilities and industry. PSI owns excellent market position in the home market and tremendous growth opportunities in international markets. With innovative products, PSI enables its customers to utilise labour, energy and natural resources in an economical and environmentally friendly manner and provide them a competitive advantage. This will create long-term value for share-holders and develop long-term growth opportunities for PSI. Revenues by segment 2015 Operating profit by segment 2015 Revenues by region 2015 Source: Company data Source: Company data Source: Company data Segment data (EUR m) e 2017e 2018e Revenues (growth in %) Energymanagement 64.1 n.a % % % % Produktionmanagement 79.6 n.a % % % % Infrastructuremanagement 31.6 n.a % % % % EBIT (margin in %) Energymanagement % % % % % Produktionmanagement % % % % % Infrastructuremanagement % % % % % Source: Company data, quirin bank estimates Shareholder structure EPS: quirin bank vs. consensus Recommendation Overview Source: Company data Source: quirin bank Research, Bloomberg Source: Bloomberg Company guidance 2016 Sales: Mid single digit percentage increase EBIT: EUR 11-13m EBIT margin: slight rise Leading Industrial IT set for growth 4

5 Profit & loss statement Profit & loss statement (EUR m) 2014 YOY 2015 YOY 2016e YOY 2017e YOY 2018e YOY Sales % % % % % Unfinished Goods Other own work capitalized Other operating earnings Cost of goods Gross profit Personnel expenses Depreciation Other operating expenses EBITDA % % % % % EBITDA margin (%) EBIT % % % % % EBIT margin (%) Net interest Income from Participations Net financial result Exceptional items Pretax profit % % % % % Pretax margin (%) Taxes Tax rate (%) Earnings after taxes Minorities Group attributable income 4.1 n.m % % % % No. of shares (m) Earnings per share (EUR) 0.26 n.m % % % % Leading Industrial IT set for growth 5

6 Balance sheet Balance sheet (EUR m) 2014 YOY 2015 YOY 2016e YOY 2017e YOY 2018e YOY Assets Cash and cash equivalents Accounts receivables Inventories Other current assets Tax claims Total current assets % % % % % Fixed assets Goodwill Other intangible assets Financial assets Deferred taxes Other fixed assets Total fixed assets % % % % % Total assets % % % % % Equity & Liabilities Subscribed capital Reserves & other Revenue reserves Accumulated other comprehensive income Shareholder's equity % % % % % Minorities Shareholder's equity incl. minorities % % % % % Long-term liabilities Pension provisions Financial liabilities Tax liabilities Other liabilities Total long-term debt % % % % % Short-term debt Other provisions Trade payables Financial debt Other liabilities Total short-term debt % % % % % Total equity & liabilities % % % % % Leading Industrial IT set for growth 6

7 DCF valuation DCF model (EUR m) 2016e 2017e 2018e 2019e 2020e TV Sales YOY change 6.2% 6.7% 8.2% 4.4% 4.3% EBIT EBIT margin 6.8% 7.5% 8.0% 8.5% 9.5% NOPLAT Reinvestment Rate 15.6% 20.2% 33.7% 20.0% 21.6% 19.7% FCFF WACC 4.50% 4.50% 4.50% 4.50% 4.50% 6.50% Cumulated WACC % % % % % % Present Value of FCF Sum present value FCF 45.5 Present value of TV In % of EV 82.3% EV Net financial debt 11.6 Shareholder value Fair value per share Source: quirin bank estimates WACC calculation TV growth rate 1.2% Risk free interest rate 2.5% Risk premium 4.0% Beta 0.5 Company interest rate 4.5% Company tax rate 25.0% Cost of equity 4.5 % Cost of debt 3.4 % WACC 4.5% Leading Industrial IT set for growth 7

8 Financial key ratios Key ratios e 2017e 2018e Per share data (EUR) EPS Book value per share Free cash flow per share Dividend per share Valuation ratios EV/Sales EV/EBITDA EV/EBIT P/E P/B Dividend yield (%) Growth Sales growth (%) EBITDA growth (%) EBIT growth (%) EPS growth (%) n.m Profitability ratios EBITDA margin (%) EBIT margin (%) Net margin (%) ROCE (%) Financial ratios Total equity (EUR m) Equity ratio (%) Net financial debt (EUR m) Net debt/equity Interest cover Net debt/ebitda Payout ratio (%) Working Capital (EUR m) Working capital/sales Leading Industrial IT set for growth 8

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10 BUY > +10% HOLD <=-10% and < = +10% SELL > -10%. Analyst certification Klaus Soer, financial analyst, hereby certifies that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. Price and Rating History (last 12 months) Date Price target-eur Rating Initiation Buy Bank distribution of ratings and in proportion to investment banking services can be found on the internet at the following address: Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin (Federal Financial Supervisory Authority), Graurheindorfer Str. 108, Bonn Contact Frankfurt am Main Schillerhaus / Schillerstraße 20 / Frankfurt am Main Management Board: Karl Matthäus Schmidt Johannes Eismann Dr. Marcel Morschbach Leading Industrial IT set for growth 10

11 Contact Details Schillerhaus Schillerstrasse Frankfurt am Main Tel.: Fax: Institutional-Sales-FFM@quirinbank.de Research Equity Research Tel. Klaus Soer +49 (0) klaus.soer@quirinbank.de Harald Eggeling +49 (0) harald.eggeling@quirinbank.de Felix Lutz +49 (0) felix.lutz@quirinbank.de Ralf Marinoni +49 (0) ralf.marinoni@quirinbank.de Equity Sales Tel. Felix Schulte +49 (0) felix.schulte@quirinbank.de Rainer Jell +49 (0) rainer.jell@quirinbank.de Klaus Messenzehl +49 (0) klaus.messenzehl@quirinbank.de Debt Sales Tel. Raimar Bock +49 (0) raimar.bock@quirinbank.de Jürgen Raabe +49 (0) juergen.raabe@quirinbank.de Rüdiger Eich +49 (0) ruediger.eich@quirinbank.de Stefan Krewinkel +49 (0) stefan.krewinkel@quirinbank.de Klaus Linnebach +49 (0) klaus.linnebach@quirinbank.de Janine Theobald +49 (0) janine.theobald@quirinbank.de Trading / Sales Trading Tel. Thomas Flügel +49 (0) thomas.fluegel@quirinbank.de Jean-Marie Frémion +49 (0) jean-marie.fremion@quirinbank.de Business Support Tel. Sule Erkan +49 (0) sule.erkan@quirinbank.de Leading Industrial IT set for growth 11