The company has stated that market conditions remain challenging with “pressure on pricing resuming in recent weeks following the modest recovery seen at the beginning of the year and during the second half of 2013. Weaker demand in China has led to a global oversupply of wafers and driven down pricing, reversing most of the gains seen earlier in the year”. As a result pricing remains below industry production costs as polysilicon, the key raw material, has maintained most of this year's price increase and is trading well above its price at the end of 2013.
That said, the company has made progress in reducing production costs to enable it to boost output and consolidate relationships with existing customers. PV Crystalox has also been developing new customer relationships to broaden its client base and to better position the business to take advantage of any medium-term market upturn.
Last year shipment volumes were boosted by inventory sales and volumes have been maintained in the first half of this year, helped by a doubling of production output. In turn, wafer shipments during the first half are in the range of 95-100MW, up from 84MW in the same period of 2013, and in line with the increase in output.
On a positive note too, PV Crystalox continues to negotiate with its polysilicon suppliers and has achieved adjustments to pricing and volumes under long-term contracts. Volumes in excess of wafer production requirements have been successfully traded to maintain inventory at appropriate levels. Moreover, guidance from the company “is for an improved market environment and a reduction in oversupply with more favourable pricing in the second half of the year”. It's fair to assume this will happen because the rate of PV installations in China is predicted to accelerate in order to meet the 14GW national target for 2014.
So although the trading update is mixed there are enough positives to favour an improvement in newsflow in the second half. Furthermore, with the company’s share price retreating all the way back to its 200-day moving average, and the 14-day RSI in heavily oversold territory, then I still feel that there is more upside than downside at this level on a medium-term basis.
Indeed, the company’s financial position remains strong and the ongoing cash conservation strategy is expected to maintain PV Crystalox’s healthy net cash position throughout the year. To put this into some perspective, with the company no longer burning cash it was able to return €36.3m (£30m) of its cash pile to shareholders at the end of last year. Factoring in the exit from the Bitterfeld business in Germany, net funds ended last year at €39.2m (£32m) or the equivalent of 20p a share. This means the current share price is below the cash pile even though guidance is for the company to “maintain its healthy net cash position”. The shares are also trading a hefty 36 per cent below book value.
That valuation could look even more favourable in the next few months because the US government has launched an anti-dumping and anti-subsidy investigation into Chinese solar products imported into the country. A preliminary determination of any countervailing and antidumping duties could come as early as next month. Clearly, any reduction in anti-competitive supply coming onto the market can only be positive on industry pricing to rebalance supply with rapidly increasing demand. In fact, according to the European Photovoltaic Industry Association (EPIA), global PV installations increased 35 per cent in 2013 driven by demand from China and Japan.
So, although PV Crystalox shares have given back all their gains since hitting a high of 29p in March, my view is that as oversupply and rising demand start to balance themselves out in the second half of this year this should lead to brighter prospects and see the price re-rate. Trading on a bid-offer spread of 18.75p to 19p, I rate PV Crystalox shares a medium-term buy albeit there could be further short-term weakness as the price bases out while investors reassess the investment case.
Finally, I published eight articles last week and another today, all of which can be viewed on my home page. I am still working my way through a list of companies on my watchlist, including API (API) and a number of housebuilders.
■ Please note that my new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. I have published an article outlining the content: 'Secrets to successful stock picking'
