August 4, 2011 / 3:01 PM / 6 years ago

Analysis: SMA Solar faces profit margin struggle

FRANKFURT (Reuters) - Europe's biggest solar company is unlikely to meet profit margin forecasts this year, analysts say, as demand in its largest markets collapses and global competitors start to force down prices.

SMA Solar has long been seen as a cash cow for the sector, treating investors to margins near 30 percent. It is the world's biggest maker of inverters, which feed solar power from daylight-converting panels into electricity grids.

But concern is growing since SMA said its profit margin in the first three months of 2011 crashed to 5.4 percent from 27.2 percent in the same period of 2010.

SMA ramped up production last year to meet a surge in demand from Germany and Italy as customers rushed to buy solar panels before governments started to phase out incentive schemes.

Now it is grappling with a toxic mix of slowing demand and high inventories.

SMA is currently aiming to deliver an EBIT margin of 21-25 percent and sales of 1.5 billion euros ($2.1-2.7 billion) in 2011 -- a mammoth task given its first-quarter performance.

Equity research performance firm StarMine, which gives more weight to timelier forecasts and those from the historically most accurate analysts, shows SMA's EBIT margin for 2011 is expected to come in at 20.5 percent, below its own forecast.

"The company will need to ship 4 gigawatts (GW) of inverters in the second half of the year to reach the lower end of its sales outlook. That's the equivalent of total global shipments in the first quarter," said WestLB analyst Peter Wirtz.

Sebastian Zank, analyst at German investment bank Silvia Quandt Research said he thought the company might miss both its EBIT margin and sales targets this year.

"We believe that it will be very challenging for the company to fulfill its guidance for 2011," Zank said.

"Overcapacity ... will hit the inverter sector strongly over the next quarters (and) competition among inverter manufacturers will rise strongly," he added.

An SMA spokeswoman said on Wednesday: "From today's perspective, our guidance still stands."

SMA Solar has in the past cautioned that its EBIT margin would fall to 20 percent in the medium term, citing strong competition in the market for solar inverters.

StarMine sees the company's EBIT margin falling to 17.7 percent by 2014.

INDUSTRY IN CRISIS?

Europe is by far the world's biggest market for solar power yet it largely depends on government subsidies because solar power is still up to eight times more expensive than conventional forms of power like coal and gas.

The sector has boomed since the start of the millennium as investors rushed to get a slice of the next big thing amid worries about climate change and new targets encouraging countries to curb carbon emissions.

Now however cash-strapped euro zone governments, grappling with debt crises and fragile economic growth, are reducing their support in order to bring down production costs and make the industry more competitive.

Producers of solar cells, which make up solar panels, were the first to come under pressure as the sheer number of competitors in the segment pushed prices into freefall.

Demand for the panels themselves held up rather better but now they and the inverter business are feeling the squeeze.

The first evidence of this came in early July when Satcon Technology Corp cut its quarterly sales outlook and said it would cut 15 percent of its workforce, citing falling solar subsidies in Europe.

Advanced Energy Industries cut its quarterly sales outlook the same day, while Power One, SMA's main competitor with a market share of more than 13 percent, cut its full-year sales outlook last week.

Power One may have cut its outlook but it is still a dangerous competitor for SMA. The U.S. company gained a foothold in Europe during the 2010 boom when SMA could not meet demand alone.

As the industry heads into a period of strong competition, pricing pressure and probable consolidation, observers expect nimble Asian firms to join the fray, further undermining SMA's position.

Investors will be closely watching SMA's second-quarter earnings which it will report on Friday, August 12.

But Commerzbank analyst Ben Lynch said he didn't expect any change to SMA's guidance before the end of the year.

"They've never profit-warned before and we think they would wait until they are absolutely sure they need to," he said, adding that any cut would not occur before the fourth quarter.

($1=.7017 Euro)

(Additional reporting by Anneli Palmen in Duesseldorf)

Editing by Sophie Walker

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