PV CRYSTALOX SOLAR (PVCS)

This early-mover advantage has allowed PV to build a robust supply chain, a decent client base and a solid share of its key markets. It is also beginning to lock-in customers and feedstock supplies on long-term contracts, such as a five-year 220MW equivalent contract announced in December with a major customer. Moreover, its flotation on London's main market in June raised €73m (£52m) - that will help to finance a silicon production plant which, when completed, should guarantee a supply of silicon.

That investment looks like it's going to be needed. Since the beginning of the decade, the global solar market has grown at 40 per cent annually and installed capacity totalled 6.6 gigawatts at the end of 2006. The European Photovoltaic Industries Association forecasts that this will treble by 2010 as favourable feed-in tariffs (subsidies), coupled with advancements in technology, encourage a wider take-up of solar power.

At present, the company's most significant customers are in Japan - although many of the panels in which PV's wafers are installed end up being exported back to Europe. Prospects look good in Europe, too, though. Germany has traditionally been the market driver but, over the past year, Spain has taken up the reins thanks to a strong government push. This is now being mirrored in Italy and Greece and to a lesser extent in France, with market conditions likely to remain ripe for some years to come.

Certainly, the solar sector's continued reliance on subsidies, in the form of feed-in tariffs, to enable it to compete with traditional forms of power generation, is hardly attractive in the long term. However, as solar power usage begins to gain critical mass and the technology continues to improve, costs should continue to fall. PV chief executive Ian Dorrity believes that solar will reach "grid parity" in five to seven years' time, although this could be accelerated if the cost of producing power from fossil fuels continues to rise.

One problem is that the development of the solar market has resulted in a shortage of silicon - the raw material of choice for most forms of solar power generation. On top of long-term demand from the electronics industry, the recent surge in demand from solar companies has sent the silicon price soaring.

But PV has a significant advantage here over rival solar wafer makers and, in particular, over new entrants from emerging economies such as China. Its longevity in the business has helped it to tie down long-term silicon supply contracts. So PV's wafers are still cheaper than those coming from low-cost parts of the world where silicon must be bought at the prevailing spot price. PV's relative advantage here should be reinforced when the group opens its own silicon production facility in Germany in 2009.

Current performance looks good, too. In December's trading update, PV said that strong market conditions would result in full-year profits coming in materially ahead of expectations. Meanwhile full-year production should be equivalent to 190MW-195MW, although performance was tempered by the relatively weak Japanese yen.

Still, that currency issue isn't much to worry about when set against the group's robust position in a sector with excellent long-term growth prospects. Neither are the shares expensively rated. They trade on 17 times broker Kaupthing Singer & Friedlander's earnings estimate for 2008, which is well below that of PV's main rivals - shares in German solar technology specialist Solarworld, for example, trade on 32 times 2008's forecast earnings. Buy.

BULL POINTS:

• Fast-growing solar market

• Cost advantage over rivals

• Planned silicon plant should guarantee supplies

• Shares inexpensively rated compared with those of peers

BEAR POINTS:

• Silicon costs are high

• Sector remains dependent upon subsidies