Here is the analystâs quick comment.
By the way, it was quite clunky that the earnings call was held on Teams and required pre-registration, so a latecomer following another call couldnât join on the fly.
Ping @Pauli_Lohi, Inderes probably has a better-functioning solution to sell for this at an affordable price.
Here is the analystâs company report.
H1 was weaker than expected in terms of income statement figures, but strong order growth enables strong revenue growth and business scaling starting from H2. Proving the profitability of the energy storage business would improve the stockâs attractiveness, but for now, relying on earnings forecasts for the coming years is quite shaky.
Quoted from the report:
Despite the strongly negative result, the companyâs interest-bearing net debt fell to -3.4 MEUR (i.e., to the net cash side), whereas a year earlier the balance was 0.9 MEUR on the net debt side. As much as 9.3 MEUR of working capital was released in H1, compared to 0.8 MEUR being tied up in the comparison period.
An interesting news article on Yle about how there is a boom in electricity storage ongoing in Finland. I also got the impression from yesterdayâs Merus earnings call that demand for electricity storage remains high in the market.
Another interesting observation relates to the construction method of the electricity storage systems. The NW Group batteries mentioned in the Yle article are built as containerized solutions, which is likely cheaper in the short term than Merus Powerâs solutions, for which a separate building is constructed. There are also others in Finland who provide containerized solutions. However, Merus Powerâs approach may be better and more sustainable in the long run; time will tell.
I wonder how these batteries are maintained. Are individual modules replaced based on measurement results, or how? That kind of container might be better for battery maintenance. You could bring a new container to the site and take the old one back to the factory for servicing. In Merusâs solution, the work has to be done on-site.
Instead of basing your thoughts on impressions, itâs worth looking at the actual situation out there. As wind and solar power continue to grow in the power grid, problems related to the lack of energy storage increase. You canât overstrain the grid or it will collapse. A âneighborâ has a small solar power plant, and the sales revenue is reportedly miserable when the panels are generating power.
The interview was very good and addressed the concerns well.
One thing that left me thinking from your interview regarding these large projects is their project-based nature. I have some experience suggesting that delivering projects and products doesnât really seem to fit well under the same management. So, this is something I would be interested in hearing managementâs thoughts on in the future.
In a way, I understood Kariâs explanations regarding the difficulties of the Taaleri project. However, I would have been interested in hearing how thorough a âdeep diveâ they have done/intend to do regarding the root causes (ahem.. feel free to write here, if management happens to glance at this forum). In the example provided, it seemed that either the schedule was too tight or the design quality control had failed (of course, changes requested by the customer are also a possibility).
@Jukka7, I donât think batteries are really serviced much. If a module fails, it is naturally replaced with a new one. However, the module being replaced is likely quite a bit smaller than an entire container. I see it more as such a container solution being suboptimal for performing operations on components other than the batteries themselves, for example in winterâI wonder how the weatherproofing in the container works in general? The advantage of a container solution is, of course, portability, but that probably only becomes relevant when the site owner is uncertain about the long-term nature of their business.
One thing that left me wondering after your interview regarding these large projects is their project-based nature. I have some experience of my own suggesting that delivering projects and products doesnât really seem to fit well under the same management.
@KohtiVapautta, how do you justify this?
Well, one could justify the matter in many ways, but as stated, this is about my own experiences and observations of companies that make products and, on the other hand, also large project-based deliveries. And let me further clarify that this is not a black-and-white issue; there are always many details involved, and thus every case is unique.
Iâll start by briefly outlining the differences between project and product business. By product, I mean something (can be physical, a service, or a combination thereof) that essentially repeats more or less the same way when sold to each customer. Or at least it contains a significant recurring part. This leads to the possibility of eliminating variation in production through a systematic approach (lean, six sigma, etc.).
By projects, on the other hand, I mean a process where a deliverable entity is built around customer-specific requirements, and thus projects inevitably differ to some extent. In this case, identifying and managing project risks is a way to manage variation between projects. Now, in the case of Merus, it seems thatâat least regarding the first projectârisks have slipped through the process and the delivery was delayed.
Why do I think these donât quite fit together under common management? At this point, I must make a small limitation: I believe the problem is manageable if these are separated into completely distinct business units (*). But to the matter itself: the different nature of these businesses takes managementâs attention, capital, or human resources depending on the situation, and thus the side suffering from a shortage faces challenges in doing its part. For example, failures in projects tie up both personnel and capital, making it impossible to perform necessary tasks like product development to maintain competitiveness. This can also work the other way around: when a product series with a defect requiring correction hits the market, this often requires specifically project-based expertise, potentially tying up massive amounts of resources to fix the entire issue (Iâve seen up close a few times how difficult things can get when an essential flaw is revealed in a product series with significant quantities out in the worldâvery expensive and resource-intensive).
Additionally, management often tends to be concentrated with people coming from one side or the other, leaving the understanding of the other side deficient, and thus the ability to lead the entity in the best possible way is lacking.
This is why I am very interested to hear how Merus Power sees the difference between these businesses and, actually, which side they generally feel they are on? Power quality solutions also seem strongly project-based in nature (e.g., these deliveries related to electric arc furnaces). On the other hand, products going into data centers seem closer to genuine product business? A lot depends on how risks are managed in projects and what portions are taken under oneâs own responsibility and what are not? For example, in those energy storage (battery delivery) projects, how far are construction risks taken on, or are these left for the customer to handle while only the complete electrotechnical delivery is managed? If one has to take on responsibility significantly outside their core area, it simultaneously means a need to acquire expertise in that specific field. And even though weâre talking about electrical engineering, I suspect itâs very different to perform installation and assembly at a factory compared to electrical installations and cable pulling at varying sites?
Generally speaking, from an investorâs perspective, steady, highly predictable business is always valued higher, and achieving this in project business requires quite a lot. Also, specialization always seems more valuable than a company engaged in very mixed operations.
And as stated, these are my own experiences and there are many shades of gray in between. In the case of Merus Power, while listening to Pauliâs interview, various things just came to mind that surfaced when discussing the challenges experienced by the company. For this reason, I would be interested in hearing thoughts in the future on how the company intends to approach these challenges.
(*) There are surely other ways to manage that than separating them into completely independent business units. This just seems like the easiest solution in a certain way. I believe that very honest and self-critical risk identification, classification, and quantification, making decisions purely based on these, and managementâs conscious management of expertise could possibly be ways to manage this. People (and especially engineersâIâm an M.Sc. in Engineering myself) tend to be very blind to their own deficiencies in expertise. When this is combined with a preference for working with those who have a common experience/background base, it easily leads to self-deception.
Good points, and I recognize the challenge, particularly regarding project business. Of course, Merus Power has different individuals internally responsible for project development and product sales, meaning the organization is divided into different areas of responsibility.
When dividing the business into two very different operating models, it is worth remembering that both the project and product businesses are based on the same core technology, which can be scaled into solutions of various sizes by combining components. On a small scale, A2 filters; on a larger scale, STATCOMs; and on an even larger scale, energy storage systems all incorporate similar active filter technology. To put it simply, the larger the system built from these components, the more challenging it is for Merus Power and the more the company must acquire new capabilities.
An energy storage system is an expensive entity and would require significant scale to afford keeping these at the factory for maintenance or as spare units if a failure occurs in the field. As @KohtiVapautta mentioned, repairs typically take place on-site by replacing the faulty module. I see the advantage of Merus Powerâs solution specifically in its better serviceability, as it is easier to allocate space in the building for maintenance or even store spare parts on-site for rapid repairs.
This, and thatâs exactly why this case is different from what I have experience with. At best, from a product perspective, a large project could just be the assembly of existing, ready-made building blocks. Well, reality isnât quite that simple, but in principle, that could be one way to approach this issue. So, if Merus succeeds in growing a suitable ecosystem for itself, implementing those energy storages could be very well-managed and profitable business. Personally, I believe that this kind of approach could be even more efficient than some strictly vertically integrated entity.
But I, for one, am interested in hearing how Merus approaches these things and intends to manage them more successfully in the future. I do believe that this Merus product offers an interesting foundation for these energy storage markets. But it would be interesting to understand this even better 
Edit: And I should also add that the interview and the related reflections opened up these challenges to me in a new way, and now I imagine I understand slightly better why projects are so difficult. Ultimately, itâs about people and their cooperation. And with the traditional education model, engineers arenât the easiest to get to cooperate in an effective way. Fortunately, as I understand it, the engineering community is also slowly changing, and perhaps these challenges are a dying tradition. This would be a great advantage for Merus Power and Helsinki (Hesuli) more generally, as we have many engineer-driven engineering firms.
In my opinion, Merusâs strategy and action plan look good from both a project and product perspective: getting product, project, and digital expertise in order first in Finland and then expanding into the Nordics.
The first and often also the second project is difficult, but the third project should already reach the finish line smoothly. In terms of fixing errors, the closer the project is, the better, so that all the necessary expertise can be brought on-site quickly and easily.
When doing something new, one must prepare for errors on both the product and project sidesâideally for several significant errors. It is important here that the corporate culture allows reporting errors or their risks to management as early as possible. The later an error is identified, the more expensive it becomes to fix.
One would also hope that this information flow reaches the owners without delay. Now the value dropped -20% on a profit warning, which in my opinion indicates that the communication chain is not working perfectly. But then again, on the First North marketplace, I donât really expect the owner to be the party that must be primarily informed. The most important thing is that management and employees know what is happening in the company.
I see that modularity helps tremendously in fixing these errors and delivering projects, as long as the module interfaces are ready and flawless. Learning from mistakes is also a path to developing a top-tier product and the associated project business. If patents could also be obtained for this, the competitive position would improve further.
Personally, I accept that Merus is burning money on learning. The market is in a rapid scaling phase, and future market shares are being decided now. On the project side, Merus has a very good starting position to become a leading player in Finland. Expanding the project business abroad will certainly be its own challenge, but 99% of the market is there. If Merus stays in Finland, it will be eaten by a larger player.
Merus could settle for being just a seller of a good product, but it seems competitors are selling complete solutions. A customer wanting battery storage also wants a turnkey package. In my view, combining excellent proprietary technology with the ability to deliver projects is precisely the key to growing this company to a billion-euro scale and creating a unique position in the market.
Is this easy? Certainly not.
Is it worth a try? In this sector, changes happen once or twice a century. If you donât jump on board now, youâll have to wait a long time for the next opportunity for rapid growth.
If Merus doesnât aim for a billion-euro scale and to be a world-leading player, then Iâll be jumping off this bandwagon myself.
Merus has operated globally on the product side and in power quality projects for years; the market in Finland is not sufficient. In the energy storage business outside of Finland, it is a question of what the overall package being sold is and how it is managed. In the domestic market, these turnkey deliveries are the only option, and in practice, this is also the case abroad; generally, buyers do not just want technology, but a complete solution.
IMO Merus Power would be a more interesting investment target if they focused solely on the sale of filtering equipment.
Price competition within BESS is bound to intensify, and itâs very difficult for a small integrator to keep up if battery manufacturers join the fray, as a large portion of the costs consists specifically of batteries. 
In the BESS sector, price competition is bound to intensify, and it will be very difficult for a small integrator to keep up if battery manufacturers enter the fray, as batteries account for the bulk of the costs.
I believe many battery suppliers would rather remain purely battery producers instead of entering the project business. Merusâs clear advantage in Finland is being a domestic player, and I also see that their filter solution could potentially offer its own technical advantage.
The biggest risk for Merus is being acquired by another player, but from a shareholderâs perspective, that isnât necessarily a bad thing at all, as long as it happens at the right time and certainly not too late. Expanding abroad, for instance, carries significant risks where a lot of capital can be burned â and thatâs when they come back to the shareholders for more money.
Consolidation is an inevitable outcome in this industry, and in 10 years, there will likely be a maximum of five players in the market. I donât find it very likely that Merus will be among those five, but I donât consider it impossible either if everything goes perfectly. From a shareholder value perspective, Merus should be prepared for consolidation while still striving to grow strategically and leverage its own strengths.
Conquering the world from Finland would, in my view, require unique technology that is difficult to replicate. Itâs not yet entirely clear to me whether Merus possesses this, but it could exist in their filters and software. The Nord Pool region is at least a pioneer when it comes to electricity pricing and demand response, meaning that as a market, the Nord Pool area offers a fairly unique platform for technology development. Focusing on medium-sized battery storage and regional grid balance management might be exactly the right focus.
There could still be more unpleasant surprises in store for investors in the short term, over the next year or two. Although people here understand how challenging the first projects are, the market doesnât necessarily realize it, and it might not be priced into the stock yet. Taaleriâs project is badly delayed. Equity could be completely wiped out by mistakes and delay penalties in the first battery projects, and the projects might not even be profitable. I wouldnât be surprised by a directed share issue at some point, for instance.
There could still be more unpleasant surprises in store for investors in the short term, over the next year or two. While people here understand that the first projects are challenging, the market may not necessarily understand this, and it might not be fully priced into the stock yet.
In my view, Merus is currently priced quite moderately considering the high-quality products in its portfolio that are in growth markets. I think current valuation multiples are comparable to legacy players like ABB or GE, which have a lot of old products in declining markets in their portfolios. The valuation multiples are even lower than those of these dinosaurs.
So, Merus is certainly not driven by any hype. However, there will surely be volatility, especially compared to the legacy players, and tackling the challenges in ongoing projects is critically important.
During September, professional investor Peter Friis entered the top 100 list. What are your thoughts on this?
In this stock, the top 100 shareholders own 87% of the company, and this share has been gradually increasing. There are hardly any investment funds involved, and if one were to become interested in the company, there would be significant upward pressure on daily trading if the largest owners continued to hold.
I have also noticed on LinkedIn that they are recruiting again, and are currently looking for an Installation Manager and a Construction Manager. I personally have confidence in the companyâs operations, even though the Taaleri project is behind schedule. The companyâs headcount has been increased at a good pace, and it will start showing on the bottom line in the future.
Alright, a big project has finally been completed, and the energy storage project implemented for Taaleri was commissioned over the weekend.