We analyzed the recently published Global 100 list of most sustainable corporations by Corporate Knights and noticed a new addition in the tenth position, SMA Solar Technology AG (OTCPK:SMTGF)(OTCPK:SMTGY). We previously overlooked this European renewable energy company due to its spotty profitability track record, assuming that the inverter market was dominated by Enphase Energy (NASDAQ:ENPH) and SolarEdge (SEDG). Upon further examination, we were impressed by the progress SMA Solar has made and the reasonable valuation it offers, similar to Enphase and SolarEdge. This led us to take a small starter position in the company. Despite its ten-year total return performance, the company is not frequently discussed, and we find its outlook to be promising.
SMA defines itself as an “energy transition” company, offering a range of clean energy products and services to facilitate a more sustainable future. While it is well-known as a solar inverter company, it has expanded its ambitions to include energy management products and services. The company is close to finishing a new factory, expected to almost double its annual production capacity to 40 GW by 2025. Additionally, SMA offers charging solutions for electric vehicles and develops hydrogen projects, with over fifty projects completed, totaling more than 500 MW. It also specializes in integrating and managing battery energy storage systems (BESS) in complex energy projects. This strategy has strengthened its competitive moat, offering complete renewable energy solutions to customers.
The company expects rapid growth in the Business segments it operates in, with PV inverters and battery solutions remaining important parts of the mix, but other segments contributing significantly to growth as well. It anticipates these markets to grow with an average 21% CAGR through 2026.
Financially, the company has seen significant improvement, with profitability rising to 180 million Euros in the first nine months of 2023, compared to 11 million Euros in the corresponding period of 2022. Despite increased CapEx, the company managed to turn its free cash flow around to 79 million Euros. While SMA’s gross margin is improving, it still lags behind Enphase’s but has shown impressive growth. Enphase’s revenue growth has been exceptional in recent years, but recently, SMA has started delivering rapid growth, potentially recapturing lost market share. Both companies have solid balance sheets, with SMA carrying no long-term debt and a net cash position of ~$300 million.
The outlook for both companies is positive due to a strong push for renewable energy globally. SMA Solar, in particular, is expected to benefit significantly from various programs. Expectations are for their end markets to roughly double by 2026 when compared to 2022. The company anticipates entering a new phase of reduced production costs, higher production capacity, and exponentially growing demand. There have been positive signs, with enhanced full-year 2023 guidance and continued strong revenue growth and profitability in the fourth quarter.
What makes SMA Solar Technology particularly compelling is its attractive valuation, despite the size of the opportunity. Its price/book multiple is lower than its historical average, and its price/earnings and EV/Revenues multiples are extremely low compared to its peers. This suggests skepticism from investors about the company’s growth potential, despite industry tailwinds and gross margin improvements. However, the risks are mitigated by the companies’ strong brands and solid balance sheets.
The solar industry has been cyclical and dependent on subsidies in the past, but with the cost of wind and solar energy now often lower than alternatives like natural gas-powered plants. Industry consolidation has strengthened the remaining companies, and difficult times forced them to become more efficient and adaptive. While Enphase remains relatively elevated in its valuation, SMA Solar Technology presents an opportunity with a promising upside.
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