Translation: Original published in Finnish on 01/27/2025 at 7:53 pm EET

The growth strategy, based especially on scaling the energy storage business, has progressed recently through a strong order intake. We also expect profitability to improve during 2025-26. However, we do not feel that the expected return at the current valuation becomes attractive enough unless the company can exceed the general profitability level of the industry or accelerate its growth more than our current assumptions. We reiterate our Reduce recommendation, but raise our target price to EUR 4.3, supported by recent favorable orderdevelopment (was 4.0).

Power electronics for growing market segments

Merus Power is a Finnish technology company founded in 2008 that designs and produces energy storage systems, power quality solutions and related services. The company's products are based on self-developed modular technology and software, which enable easily customizable and high-performance solutions for various applications. Energy storage is the company’s strongest growing product segment driven by up to 18% annual market growth, which is particularly affected by investments in renewable electricity production. The market for power quality solutions is also growing at a brisk rate of about 7% per year. Power quality solutions are entirely based on the company’s proprietary technology and the same scalable technologies are also used in energy storage systems. About half of the value of the company's energy storage production is based on proprietary technology and the rest, such as batteries, is purchased from external suppliers, which we estimate reduces the relative gross margin profile of energy storage. The company has delivered its power quality solutions to more than 70 countries through its extensive distribution network. The energy storage business is more local and the aim is to expand it from Finland to the rest of Europe through partnerships.

Profitability turnaround forecasted for 2025

Profitability has been weak in 2023-24 due to the ramp-up phase of the business, where the company's cost base has increased due to strong recruitment and other opex investments, while the delivery processes of larger energy storage systems have still been partly in the learning phase. However, we estimate the situation will change significantly in 2025-26, when our EBITDA forecast rises to 2.1-3.9 MEUR (5.0-7.2% of revenue, EBIT 1.4-4.0%). The company has a strong order backlog, based on which we forecast revenue growth of 41% for 2025. We feel the development phase of the organization has matured, and the energy storage systems developed in 2023-24 can be reproduced in a scalable manner, which should support efficiency in the coming years. The company's aim to expand energy storage system deliveries outside Finland could reduce its dependence on the Finnish market, which we believe would positively impact the predictability of growth in the long term. Also in power quality solutions, the demand outlook has clearly improved and the company has continued to strengthen its distribution channels. We raised our forecasts slightly with the recent good order intake.

Valuation multiples remain elevated for several years 

The valuation of a growth company on the verge of a profitability turn such as Merus Power must be based on future cash flows. The earnings-based valuation for 2026-27 (EV/EBIT: 20x and 13x) exceeds the level of the closest peers and does not, in our opinion, offer an upside considering the risks. The success of the profitability turnaround in the coming years could give an indication of the long-term profitability level of the energy storage business and be a significant valuation driver. Our current estimates assume an EBIT margin of 4-5% for 2026-27, which roughly corresponds to the profitability levels of larger peers such as Wärtsilä and Fluence. Achieving the company's targeted 15% EBITDA margin (corresponding to an EBIT margin of some 12%) could multiply the share price, but we consider this unlikely due to the low margins in the energy storage sector.