Merus Power - Power quality, storage and more

[SijoitusSeppo]

On a quick look, I’m not very interested. It smells a bit like a “crowdfunding-level” case, where a technology that has been developed for over ten years (!) and, according to their own words, is completely superior, still hasn’t really taken off (ok, it has become profitable and 10M€ is at least some kind of revenue), and then suddenly we are at a point where organic growth is expected to explode by ~40% p.a. for the next five years.

@Musti

If we assume the maximum pre-money valuation is 31M€, then:

• 2020 figures P/E: 756 and P/S: 4.8.
• 2019 figures P/E: 52 and P/S: 3

Apparently, you have calculated those P/E ratios incorrectly from the operating profit (EBITDA)(?), didn’t the company make a loss of almost half a million in 2020, meaning the P/E for last year was negative? With the 2019 result, the P/E would be 287. Let’s be very generous and assume the company’s record-high 3.4% profit in 2018 and the upper end of this year’s revenue forecast of 15M€, the P/E would still be a whopping 82. (I understood from the posts on this forum that the post-money valuation would be 42M€, I have not checked the numbers myself).

Although P/E is supposedly a boomer metric, I don’t understand why I would pay such multiples for a company that has no evidence yet that it can actually achieve such ~40% growth figures. If I want to invest in an outrageously expensive growth company, I can invest in one that at least has a proven track record of growth and a very predictable continuation (e.g. Qt). One can certainly argue that when that growth takes off as the company predicts, the growth leverage will eat up the multiples, but even if the CEO predicts that 15% could be the EBITDA level, you can’t make this into an earnings machine, if 5-10% even remains below the line as profit.

TLDR: The company and the case might be interesting, but the valuation is absolutely outrageous given the current performance.

[Musti]

@SijoitusSeppo

Apparently you have incorrectly calculated those P/E ratios from EBITDA (?), didn’t the company make a loss of almost half a million in 2020, meaning the P/E for last year was negative? With the 2019 result, the P/E would be 287. If we are very generous and assume the company’s record-high 3.4% profit in 2018 and revenue at the upper end of this year’s forecast of €15M, the P/E would still be a hefty 82. (I understood from the texts on this forum that the post-IPO valuation would be €42M, I haven’t checked the figures myself)

You are absolutely right, I had apparently carelessly calculated the P/E with the wrong E… I will correct my calculations.

Well, the basic point is still the same, you can’t get an attractive case out of it with P/E.

[erkki2]

Practiced in the industry for many years with non-existent or negative profitability. More money is needed. The current operating margin level is nowhere near enough when seriously expanding into exports. - An interesting industry, competition is surely abundant. Are there any patents protecting it? That’s a core question. Otherwise, the know-how will be copied in half a year by, for example, a Chinese company.
It smells fishy that the current owners are reportedly selling their shares if oversubscribed. Lack of faith or personal financial difficulties. In any case, it can be interpreted that these owners would not subscribe.

[Hapakka]

@erkki2

It smells odd that the current owners are apparently selling their shares if oversubscribed.

I don’t know what the general practice is, but isn’t this quite logical? Anchor investors have defined the maximum valuation after the offering. If it’s oversubscribed and new shares are issued, then the valuation also swells, so the only option is for the old owners to sell their old shares. Would it be a better option if there was no additional option, meaning private investors would get even smaller crumbs of what they want?

[Chuckecheese]

https://www.inderes.fi/fi/tiedotteet/merus-power-oyj-sahkovarastojen-kaytto-etenee-elenian-sahkonjakelun-turvaamisessa

[erkki2]

Yes, it would be more sincere. It gives the impression that one’s own investment is being lightened at the expense of ordinary people. Why else would you give it up if the company seems good? The current owners could sell even after the IPO, but this way they get a more certain price. - I see these tricks as “leading” ordinary people on.
More generally, the hope of quick profits seems to be more behind participating in IPOs. A poor investment strategy.
But from the perspective of the IPO companies, it’s good that they get free mania from the market, and people’s capitalism also develops.

[Matkalle]

In my opinion, the group of anchor investors is one that can smell out a potentially successful company. I’ll have to see if Merus or Netum, or both, will be joining the ride. They are both interesting companies in their own right.

Merus’s global conquest is certainly tempting, but my investment philosophy doesn’t really allow me to jump on board with a company that isn’t making a profit.

[Yu_Gong]

On Monday, there are two IPO company presentation events, one starting at 5:00 PM (Merus Power) and the other at 6:00 PM (Netum). Here is the viewing page for Merus Power Merus Powerin yhtiöesittely 24.5.2021 - Inderes

[Cloud_Explorer]

@Matkalle

Merus’s world domination is tempting, but my investment philosophy doesn’t really allow me to jump on board with a company that isn’t profitable.

In principle, neither does my investment philosophy, which is why I need to examine this very carefully now. On the other hand, if one participates in the IPO, it’s most likely such a small slice for a retail investor that the fall won’t be from a great height. And in my opinion, the company operates in a very interesting field. Primarily, I then have to consider how large of a pot I dare to build up after the listing.

[Contrafun]

Merus Power aloittaa First North -listautumisannin ja julkaisee...

• The subscription price for shares in the public offering is 5.62 euros per share.
• The market value of the share capital would be 43 million euros if the offering is fully subscribed.
• In the institutional offering, a maximum of 2.3 million shares are preliminarily offered.
• In the public offering, 0.68 million shares.
• The maximum number of shares offered in the personnel offering is 16,000.

Merus Power’s guidance for this fiscal year is revenue of 13-15 million euros and EBITDA of 1 million euros.

If one wants to compare, for example, to Alfen’s figures at the time of its IPO:

• Alfen Prospectus: “Alfen estimates that its total revenue will increase to above €99 million in 2018”
• “Based on a reference price of € 10 per share, the total market capitalisation of Alfen at opening was € 200 million.” (Alfen celebrates IPO on Euronext)

[Gazza]

It strongly seems like it’s worth participating in this, at least if you’re interested in quick profits in the form of gas money. The offering is quite small. It also operates in an industry that’s currently quite fashionable.

[Chuckecheese]

If the market value turns out to be 43 million, the forward P/S ratio will be 3.3, calculated from the lower end of the guidance at 13 million. It’s not incredibly expensive if the company guides for a realistic long-term EBITDA margin level of 15% and it’s a company that is currently profiled as a full-fledged growth company whose market is organically pulling very strongly in the coming years.

It’s still a bit unclear to me how Merus intends to differentiate itself from competitors and if they have any advantages over them. The CEO mentioned in an interview that the technology must be top-notch in the industry to avoid price competition, but this doesn’t offer much in the way of concrete details at this point. Somehow, at this point, the sum and substance feels like a potential case, but there are still many moving parts and uncertainties on the table. Let’s see Monday’s presentation, and hopefully, we’ll be a bit wiser after that

[Passi]

@Chuckecheese

It’s still a bit unclear to me, at least, how Merus intends to differentiate itself from competitors and whether they have any advantage over them. The CEO said in an interview that the technology must be top-notch in the industry so as not to get into price competition, but this doesn’t offer much concrete at this point.

Inderes’ company presentation at 9:45:

“Our uniqueness comes from our ability to combine power quality and energy storage technologies in a unique way. There is no other company that has strong expertise in both energy storage and power quality. That is our significant superior competitive factor.”

Those more familiar with the industry can then comment on whether there is any truth to this and if there is a market for it.

[anon5881868]

Frankly, I don’t immediately grasp how quality and inventories can be uniquely combined. Of course, it certainly helps to get filters or similar items from the same company if needed, but the need for additional compensation or filters is determined by a consultant, and they are not installed just in case. So, relative to the size of the projects, not many are bought. In such a case, it is essentially the same whether you get these power quality devices from the storage container supplier or from some other party.

[Juupeli]

Merus’s investor webcast today was quite unremarkable. The CEO repeated the same things that were in the presentation, and in the Q&A section, genuinely relevant questions (like what constitutes the competitive advantage or why a customer would buy from Merus and not a competitor - or the most important one, how the company plans to grow as it aims to, which was only discussed at a very general level without concrete content) were ignored. This does smell a bit like cashing in on hype, but I wouldn’t be surprised if investors swallowed the bait and the offering is oversubscribed, because the industry itself is interesting.

[Toomas_Rahula]

People are buying because of the hype → more hype → people are buying because of the hype. I guess at least those who get lucky with the stock lottery will make quick profits. It would probably be fine for a longer hold if the promised goals are met, but I’m not sure about that…

[Contrafun]

Ample time was allocated for the Q&A session. As usual, the answers were quite general.

A few observations on Merus Power’s intellectual property strategy for this thread.
Note: I am not an expert in the field. I do not own any shares or have any other affiliations with Merus Power. The purpose is merely to list publicly available information for those interested in the company.

Intellectual Property Strategy
Page 12 of the listing prospectus states that Merus Power consciously chooses not to patent some of its technologies and publishes some of its technologies, for example, in scientific publications, to ensure freedom of movement from potential patents by other companies.

• According to the prospectus, “there is no certainty that Merus Power will thus achieve sufficient protection for its technologies.”
• Page 81 states that the company believes that, especially in software technology patents, describing algorithms in connection with patenting makes it difficult to practically protect innovations.
• These same points were reiterated in the webcast, and according to the CEO, the company’s intellectual property strategy is to “patent based on commercial utility”.

Patent
Page 81 of the listing prospectus states that Merus Power has one patent concerning uninterrupted power supply technology:

Quote from page 81 of the prospectus:
“The company was granted one patent in 2018 concerning uninterrupted power supply technology, which provides protection in South Korea and the United States and is valid for 20 years. The patent application is also pending in Europe, where it has been subject to one opposition during the application phase. A decision on the application is expected during 2021. The company intends to expand its patent portfolio to protect various technologies.”

According to the prospectus, Merus Power’s uninterrupted power supply technology refers to UPQ systems and UPQ technology => Merus™ Uninterrupted Power Quality, UPQ
=> website: https://www.meruspower.fi/products/upq/

However, the listing prospectus does not contain more detailed information about the patent granted to the company.

In the webcast, this image was shown to the audience regarding the intellectual property strategy. As the image shows, Merus Power’s patent for uninterrupted power supply (Merus™ Uninterrupted Power Quality, UPQ) technology is “Method and apparatus for compensating non-active currents in electrical power networks.”

• US10148095B2 - Method and apparatus for compensating non-active currents in electrical power networks - Google Patents
  https://patentimages.storage.googleapis.com/8c/62/70/c6c88a4b2d29ff/US10148095.pdf
• Filed: March 17, 2014
• Date of Patent: December 4, 2018
• Assignee: MERUS POWER DYNAMICS OY
• Inventors: Aki Leinonen, Jyri Öörni

---

If the strategy is to patent based on commercial utility, one could assume that uninterrupted power supply is the core of the company’s expertise. I will add a few more data sources on UPQ at the end.

Merus Power’s YouTube channel features an introduction video to uninterrupted power supply technology.

Older presentation material from Merus Power is freely available online. I’ll add the links here, as they at least tell something about the situation in previous years at the time of presentation.

• Slide deck from 2019, with information about Merus’s uninterrupted power supply technology (UPQ) (78 pages)

https://pos-energy.co.il/wp-content/uploads/2019/06/Merus-Power-Power-Quality-Tel-Aviv-04032019-Aki.pdf

• An even older presentation from 2017, containing up-to-date information on the team’s experience and references (64 pages)

https://kotkoff.com/wp-content/uploads/2018/07/Merus-Power-System-Experience-14032017.pdf

[Chuckecheese]

That presentation yesterday was really good; at least for me, the case became a bit clearer again. I was actually surprised that power quality solutions currently account for 75% of revenue. However, Merus communicated its intention to now focus on the energy storage market, aiming for it to generate most of its revenue by 2026. This is reasonable, as the energy storage market is expected to grow at an annual rate of ~20% in the coming years, so there will be plenty of work there. The power quality market, on the other hand, is estimated to grow by 5-7% annually. So far, the customer portfolio is also well diversified, with the largest customer accounting for 12% of revenue. So there’s no significant risk if one customer were to be lost.

In addition, I think the CEO explained the competitive landscape well, noting that many competitors are relatively large players (Tesla, ABB, Siemens, for example) and described them more as big generalist players. Merus, on the other hand, is a smaller but more agile player that can tailor solutions more effectively for specific customers. Could there be some parallels here with the IT services market, where smaller players have also done well with their agility and flexibility at the expense of the larger players’ more rigid generalist solutions? This also made me think that Merus could, in some time, be a potential acquisition target, where a larger player might buy it. But at this point, it’s perhaps too early to assign too high probabilities to this.

The company also has its own technology; its grid inverters are proprietary in energy storage systems, as are its active filters and compensators in power quality solutions. The company’s R&D budget in recent years has been around one million euros per year. So, the products are definitely not yet finished, and efforts are being made to improve them further. If these proprietary technologies had, or could develop, significant competitive advantages over rivals, this would become very interesting.

The company’s business model is relatively capital-intensive, and the CEO communicated that the global component shortage would also affect Merus if it continues for an extended period. For now, I’m slightly concerned about the significantly increased debt ratio and the relatively weak and fluctuating return on equity figures from recent years.

In my view, the core of this investment case is how Merus succeeds in expanding in the energy storage market in Europe. If it succeeds big and the 2026 target is even partially met, this could be an excellent investment. However, if the growth investments fail, this will certainly fall flat badly. Overall, I am cautiously positive about the whole situation at this point, and we will keep an eye on how the company’s growth investments progress

[Omavaraisuushaaste]

As promised, I wrote an IPO analysis of Merus for my blog.

Merus Power – listautumisanti analyysi - Omavaraisuushaaste

Even though the price is considerably higher than in other recent offerings, it’s hard not to be excited about this one. There are very few pure-play megatrend companies like Merus on the Finnish stock exchange – especially in the energy sector.

Merus has enormous potential, but the same thing caught my eye in the presentation and prospectus as it did for @Chuckecheese: the market that is growing the fastest (and where, for example, competitor Alfen, mentioned in this thread, is growing at an annual rate of 26% and in the EV charging sector at 100%) accounts for only a very small portion of Merus’s current revenue. The majority of revenue comes from boring electricity quality solutions, which grow at 4-5% annually, as opposed to electricity storage, which grows at 20%.

However, I think this is a double-edged sword – on one hand, there is no evidence of success in this growing field; on the other hand, if they manage to penetrate this market more strongly, the offering price will become very affordable, very quickly.

The sales by current owners strike me as a bit odd, because if the future is as sweet as promised, there is no financial sense in selling at this point – unless the goal is to increase the stock’s liquidity. The track record to date is also not convincing at all, with revenue fluctuating very wildly in one direction or another, and even though the order book has now grown nicely to a record high, it is difficult to foresee the development of Merus’s operations due to the pendulum of the past.

More thoughts in the article, but I still marked this one for the minimum amount, because the size of the offering again ensures that only pennies will be left in hand. We’ll see what kind of first-day jump we see, whether it would make sense for additions to the speculation portfolio.

[Vichy]

These domestic offerings don’t motivate participation when only pennies are being distributed.