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OPINION

Glimmers of light for PV

Glimmers of light for PV
August 21, 2014
Glimmers of light for PV
IC TIP: Buy at 18p

Market pricing remains the key issue. The oversupply in the market resulting from weaker demand from China, and the resumption of trade disputes, has sent wafer prices below the cost of production and reversed the recovery in wafer and cell prices seen in the latter part of 2013 and the first quarter this year. Global PV installations were more subdued than predicted, the net result of which was that PV Crystalox posted a first half operating loss of €5.74m (£4.5m) and a loss per share of 4.4 cents (3.5p).

However, there are reasons to still believe that a recovery in trading could commence in the second half, a point I made in my last update on the company three months ago (‘PV to shine in the second half’, 19 May 2014).

For instance, industry analysts predict that global PV installations will rise from 39GW in 2013 to somewhere between 45-50GW this year including 15GW of installations in the final quarter alone. That seems a sensible forecast in light of the fact that China's National Energy Administration recently confirmed the country’s 2014 target as 13GW. Having only installed 3.3GW in the first half, this means there will be a significant ramp-up in second half demand. If these predictions prove correct then at least this should halt the wafer price reversal seen since April. In fact, as supply and demand comes closer, a tightening of the market could even lead to a recovery in wafer sale prices.

It’s also worth flagging up that the company has made progress in reducing production costs to enable it to boost output and consolidate relationships with existing customers. PV Crystalox has developed new customer relationships too in order to broaden its client base and to better position the business to take advantage of any medium-term market upturn.

This helps explain why wafer shipments during the first half rose to 99MW, up from 84MW in the same period of 2013, and in line with the increase in output. That said, due to the unfavourable pricing environment the company remains in cash preservation mode and production levels are running at only around 30 per cent of its 750MW operating capacity. This is a sensible approach to adopt by management, at least until wafer prices rise above production costs.

It’s also worth pointing out that the company has been renegotiating terms with its polysilicon suppliers to modify pricing and volumes under long-term contracts. So although polysilicon purchase volumes exceeded production requirements in the latest six month period, PV Crystalox was able to trade excess polysilicon at market prices to manage inventory. Importantly, polysilcon prices have been stable and are above the level at the start of the year. As long as this remains the case PV Crystalox will be able to trade excess inventory with minimal financial impact.

In addition, the company has been renegotiating three long-term supply contracts with customers to supply wafers in light of the collapse in market prices since these contracts were entered into in 2007-2008. Last week, a settlement was agreed on one contract whereby the customer will pay €8.7m (£7m) to PV Crystalox next month to exit the agreement. There are another two contracts still under negotiation. The company is aiming to resume wafer supply with the first customer, and has lodged a claim with the second which is likely to be settled within the next six to 12 months. I would point out that that the size of this settlement will be significantly less than the aforementioned €8.7m payment.

Strong financial position

Clearly, it’s never ideal for a company to rack up a chunky operating loss, but more important is the cash implication of these losses. In this regard, PV Crystalox’s net cash position declined from €39.2m at the start of 2014 to €35.4m (£28.2m) at the end of June. Based on 160m shares in issue, net funds were 17.7p a share at the half-year end. Add to that figure next month’s cash payment of €8.7m, or the equivalent of 4.4p a share, and proforma net cash rises to around 22p a share.

In other words, PV Crystalox shares are priced well below the level of the cash pile even accounting for operating losses since the end of June. Moreover, the company’s net asset value of £43m equates to 26p a share, of which the cash pile alone is 22p, so there is additional asset backing in hard assets to support the investment case. These are mainly plant and equipment.

True, there is no guarantee of a second half recovery in trading, but with the share price well below the level of the cash pile that risk is already priced into PV Crystalox’s depressed valuation. Importantly, I still believe that if oversupply and rising demand start to balance out in the second half of this year, then there is scope for the shares to re-rate. So trading on a bid-offer spread of 17.5p to 18p, I continue to rate PV Crystalox shares a medium-term buy.

■ Simon Thompson's 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. Simon has published an article outlining the content: 'Secrets to successful stock-picking'