More often than not when this happens the share price of the company gets a boost as demand for the shares rises as soon as a wider investor audience cottons onto the value creation. This is timely right now because one of the companies on my watchlist, solar-wafer manufacturer PV Crystalox Solar (PVCS: 12.25p), has just announced details of a 7.25p a share capital return and one which requires shareholders to act now.
The general meeting to approve the cash return is scheduled for 19 November and investors have until 26 November to either opt for the 'B' or 'C' share alternatives. The 'B' shares will be issued on 27 November, will be redeemed on 4 December and are treated as a capital return for UK shareholders. The 'C' shares will also be issued on 27 November and will pay a dividend of 7.25p a share on 4 December which will be taxed as income.
Depending on whether you are a basic-rate taxpayer, a higher-rate taxpayer or have unused capital gains tax allowance for the current tax year will determine which is the best option for you in order to minimise the potential tax liability from either of these cash returns. For most investors it will make sense to opt for the 'B' share alternative. Please note that shareholders who do not opt for either option will be deemed to have elected for the 'C' income option in respect of their entire holdings.
Also, as part of the capital return process, PV Crystalox Solar will be consolidating its share capital with shareholders receiving five new shares for every 13 currently held. The rationale is to maintain the share price at the current level, adjusting for the £30.2m of cash the company is returning to shareholders.
What this means is that post the capital return and share consolidation, the company will have 160m shares in issue by early December, implying a market value of £18.8m. It therefore pays to understand what will be left in the company to determine whether it is still worth holding the shares.
Cash flow positive
To recap, I recommended buying PV Crystalox Solar's shares at 12.15p at the start of this year ('Seeing the light', 21 Jan 2013), having been attracted by the combination of a potential cash return and management being able to salvage some value from the business. The results for the first six months of the year clearly show that the company is delivering on its objectives.
The business is now being run with the aim of conserving cash in view of the challenging trading environment, which has led to a focus on cost control and inventory management, including trading of excess polysilicon as opportunities arise. In fact, in the circular outlining details of the proposed cash return, the board notes "the adjustment of operations to align with anticipated sustainable short-term demand will enable positive cash-flow generation during 2013 and leave the business well positioned should the market begin to recover".
It's worth pointing out that the company's wafer shipments exceeded production output in the first half of this year and reached 79 megawatts (MW), which was significantly above the 61MW reported for the same period last year. Inventory levels of both wafers and polysilicon have been slashed by a third (to around €30m) since the middle of 2012. Production costs have been lowered, too, as a result of the more favourable pricing that has been negotiated to date with the company's wafering subcontractor and polysilicon suppliers.
Moreover, if you drill down through the half-year numbers, PV Crystalox's continuing operations actually made a profit of €1.5m, but the reported loss came in at €900,000 due to a €2.4m loss on discontinued operations. And even if you adjust for currency gains, the ongoing business still traded modestly in the black, quite some achievement given the difficult market backdrop. Guidance is for a "small operating loss for the second half".
Importantly, the loss-making plant at Bitterfeld, Germany has now been sold to local management in return for a cash payment of €12.3m (£10.5m) from the company. Polysilicon production has been suspended at Bitterfeld for the past couple of years, since when the facility has operated in idle mode and has been racking up annual cash losses of around €9m.
Trading below net cash
Adjusting for the €12.3m cash payment made to the local management of Bitterfeld, at the end of June PV Crystalox had net cash of €64m (£54.5m), or 13.4p a share, which is unlikely to have changed much since then given the latest guidance issued by the board. It's also worth noting that the cash pile represents a significant proportion of PV Crystalox's net asset value of €88.6m, or 18.5p a share. So, by my reckoning, post the issue of the aforementioned 'B' and 'C' shares, the company will have pro-forma net assets of £45m by early December, of which net of cash will account for £24.3m. Based on 160m shares in issue post the share consolidation, this means pro-forma book value will be about 28p a share, of which net of cash will account for 15p share.
In other words, with the company's shares trade on a bid-offer spread of 11.5p to 12.25p, valuing PV Crystalox Solar's ordinary shares at only £18.8m post the issue of the 'B' and 'C' shares, the company is being valued 25 per cent below likely year-end net cash and on a huge 57 per cent discount to pro-forma book value. Even accounting for the unfavourable trading backdrop, that rating looks anomalous to me given that PV Crystalox Solar is no longer bleeding cash.
The shares clearly carry higher than average risk, but none the less they continue to rate a highly speculative buy. My target price is 15p.
Lights camera and get ready for action
Bollywood film producer Eros (EROS: 250p) has updated the market on the proposed cancellation of its Aim listing and the transfer of trading in its shares to the New York Stock Exchange (NYSE). This is now likely to take place around Monday 4 November, a couple of weeks later than originally planned.
As a result of the US listing, the Aim-traded shares of UK shareholders will be exchanged for US shares in the NYSE-listed company. In my opinion, a US-listing will give Eros a strategic advantage, access to additional equity capital and liquidity, as well as trading with a more comparable peer group with broader analyst coverage.
It is also one that I expect US investors to warm to given that Eros's shares are hardly being overvalued on a forward PE ratio of 11 for the financial year to March 2014. Moreover, the company is currently only being valued on an enterprise value (market value plus debt) of nine times this year's cash profits. This compares favourably with US content providers.
As I pointed in my analysis last month ('Buy ahead of the IPO', 11 Sep 2013), I feel that US investors will be attracted by Eros's game-changing joint venture with US premium network operator HBO, which significantly increases the appeal of the company's shares to US fund managers. This landmark agreement not only brings the best of Hollywood and Bollywood together, but means that Eros is ideally placed to tap into the rapid growth forecast in the digital pay-TV (direct-to-home satellite and cable) markets in India. It is likely to prove highly profitable as analyst Patrick Yau at broker Peel Hunt predicts that net profits from the venture could ramp up from $3m (£1.85m) on a net subscriber base of 800,000 in the financial year to March 2014, to $16.5m the year after (net subscriber base of 2.2m). In the financial year to March 2016, Mr Yau predicts net profits of $43.3m assuming net subscribers of 3.6m out of a total pay-TV market of 169m in India that year.
True, Eros's shares have slipped since news of the proposed listing was announced, but this is mainly down to the share sales of UK investors unwilling, or unable to hold the US shares. This selling now seems to have run its course, and with equity market conditions favourable, I continue to rate Eros's shares a buy at 250p ahead of the planned US listing early next month. My target price remains 350p a share based on a multiple 15 times earnings estimates.
Mechanics of US listing
Please note that following the Aim delisting, there will be no market facility in the UK for dealing in 'A' ordinary shares and shareholders wishing to deal will either have to sell these shares privately or through a broker on the NYSE in compliance with US securities laws.
If you hold the 'A' ordinary shares in certificated form or in uncertificated form in the CREST system, and you wish to sell them on the NYSE, you will need to use an eligible US broker that is able to hold securities administered through the DTC (Depository Trust Company, the US equivalent of CREST) prior to attempting to sell the shares on the NYSE.
Eros's shares will also be consolidated on a three-for-one basis prior to the commencement of trading in New York. As part of the initial public offering (IPO) on the US market, there will be an offering to US investors to raise funds for Eros to broaden the shareholder base. The number of shares to be offered, and the price range, will be announced ahead of commencement of trading in New York.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'. The book also includes a dedicated chapter on how I select my annual Bargain Shares Portfolio with case study analysis.
MORE FROM SIMON THOMPSON ONLINE....
In the past week, I have published seven other articles on the following 11 companies:
■ Randall & Quilter ('Bargain shares flying', 15 Oct 2013)
■ Oakley Capital Investments ('Bargain shares flying', 15 Oct 2013)
■ Marwyn Value Investors ('Exploiting an arbitrage opportunity', 16 Oct 2013).
■ Entertainment One ('Exploiting an arbitrage opportunity', 16 Oct 2013).
■ NetPlay TV ('Punting on new highs', 16 Oct 2013)
■ Global Energy Development ('Pay dirt beckons', 17 Oct 2013)
■ Bezant Resources ('Binary bet', 17 Oct 2013)
■ Trifast ('A timely bolt on purchase', 21 Oct 2013)
■ Noble Investments ('Bargain shares update', 21 Oct 2013)
■ Stanley Gibbons ('Bargain shares update', 21 Oct 2013)
■ Cairn Energy ('Bargain shares update', 21 Oct 2013)
