This particular capital return process is timely right now because one of the companies I have recommended this year, solar-wafer manufacturer PV Crystalox Solar (PVCS: 15p), has just returned 7.25p a share. As part of the capital return process, PV Crystalox Solar has consolidated its share capital with shareholders receiving five new shares for every 13 currently held. What this means is that post the capital return of £30.2m and share consolidation, PV Crystalox Solar now has 160m shares in issue and a market value of £24m. It also means that I have to decide whether it is still worth holding the shares.
Hefty cash backing
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. Adjust for the capital restructuring and my buy in price equates to a current share price of 12.75p. I also repeated the advice no fewer than six times in the interim period at prices between 10.75p to 12.25p, so with the shares now trading on a bid-offer spread of 14.25p to 15p then you should all be showing a profit on this holding.
It's worth pointing out that even after factoring in the £30.2m cash return, the cash pile still represents a significant proportion of PV Crystalox's current net asset value of around £45m. If my estimates prove accurate, and there is no reason to suggest I am wide of the mark, net cash is conservatively around £24m, and could feasibly be much higher. In other words, pro-forma book value per share is around 28p, of which net cash accounts for 15p or precisely the level of the current share price.
In my opinion, that still looks a conservative valuation considering that the business is being run with the aim of conserving cash in view of what is still a challenging trading environment. The main focus has been on cost control and inventory management, including trading of excess polysilicon as opportunities arise. The strategy has clearly proved successful: inventory levels of both wafers and polysilicon had been slashed by a third (to around €30m, or £25m) in the 12 months to end June; and production costs have been lowered, too, after management renegotiated pricing with the company's wafering subcontractor and polysilicon suppliers.
In fact, in a pre-close trading statement, PV Crystalox’s board has revealed that trading of excess polysilicon is in line with expectations and full year wafer shipments are anticipated to be at the upper end of the 160MW-180MW range indicated at the time of our the first half results in August. As a result "wafer and polysilicon inventories at the end of 2013 are expected to be significantly lower than a year earlier". This can only be positive for the cash pile.
Cash flow positive
Importantly, PV Crystalox's board has recently stated that 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". In other words, the operations are no longer burning their way through cash which makes it rather anomalous for the company to be valued only in line with its cash pile and on almost half its book value.
Moreover, ridding itself of the heavily loss-making plant at Bitterfeld, Germany has clearly helped realign costs to the lower production. The ongoing business traded modestly in the black in the first half of this year, quite some achievement given the difficult market backdrop. Guidance is for a "small operating loss for the second half", but I still expect cash flow from operations to be positive after accounting for non-cash items in the second half reported profits. There is a small glimmer of hope on the pricing environment too, as the board have confirmed that pricing has been relatively stable since the half year-end and spot wafer prices have actually seen modest increases in recent weeks.
So, valued in line with my conservative estimate of the current cash pile, and rated on a 47 per cent discount to pro-forma book value, the rating still looks anomalous to me given that PV Crystalox Solar is no longer bleeding cash. Even accounting for the unfavourable trading backdrop, the shares have speculative upside if you can stomach the risk and I feel a share price closer to 18p is a more appropriate valuation. Speculative buy.
In response to recent newsflow, I am currently working my way through a long number of updates on the following recommendations: Bezant Resources (BZT), Crystal Amber (CRS), API (API), WH Ireland (WHI) and Dragon-Ukrainian Properties & Development (DUPD).
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In the past fortnight I have published articles on the following 17 companies or trading strategies:
■ Trifast ('A bolt-on purchase', 18 Nov 2013)
■ Global Energy Development ('Awaiting pay dirt', 19 Nov 2013)
■ Entertainment One ('Blue sky territory', 20 Nov 2013)
■ Marwyn Value Investors ('Blue sky territory', 20 Nov 2013)
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■ Heritage Oil ('Bargain shares update', 21 Nov 2013)
■ Eros ('Conundrum to solve', 25 Nov 2013)
■ Amino Technologies ('Conundrums to solve', 25 Nov 2013)
■ Town Centre Securities ('Time to make friends up north', 25 Nov 2013)
■ Raven Russia ('Cash in on a Russian property play', 25 Nov 2013)
■ Sanderson ('An app investment', 26 Nov 2013)
■ Equity market strategy ('Betting on a Christmas rally', 26 Nov 2013)
■ Eurovestech ('Kalibrate to fuel Eurovestech', 27 Nov 2013)
■ Housebuilders trading strategy ('As safe as houses', 27 Nov 2013)
■ Bovis Homes ('Bovis poised for chart break-out', 28 Nov 2013)
■ Netcall ('Dial into cloud-based profits', 28 Nov 2013)
■ Daejan ('Bargain basement prime property', 29 Nov 2013)
