Following a major fire at its Swansea facility at the end of last year, the company made the strategic decision not to rebuild the plant, but instead return surplus cash from the $90.6m (£58.6m) insurance payout to shareholders after settling all liabilities and focus solely on its operations in Prescott, Arizona. All liabilities have now been settled and the 99-year lease on Swansea site has been reassigned which left Pure Wafer with net funds of $85.3m at the end of June, a sum worth 292 cents a share. At current exchange rates the cash pile is worth 188.5p a share, or 8 per cent more than the company share price. Of this sum, the board believe that between 140p to 145p should be returned to shareholders. Expect a further announcement concerning the timing of the capital distribution in the coming weeks.
What remains is a business in the U.S.A. which maintained record levels of production and posted cash profits of $3.3m on revenue of $15.4m in the latest 12-month trading period. The operation was responsible for 44 per cent of group turnover in the period before the fire, and has since benefited from the transfer of some of the Swansea contracts. Analyst Eric Burns at brokerage W.H. Ireland values the US business at five times cash profits, or $16.5m (£10.7m). At current exchange rates that valuation equates to 36p a share. But with the company’s share price already trading below its cash pile, then in effect the Prescott operation is in the price for free. Furthermore, to a strategic buyer, the valuation could be substantially higher than this base case. Clearly, that’s an anomalous valuation even after factoring in further investment in the US facility and Pure Wafer’s working capital requirements.
New target price
So having initiated coverage on Pure Wafer’s shares at 72.5p in the autumn of 2013 ('Time to chip in', 10 October 2013), and seen the price hit my 175p target price post last week’s financial results, I can still see further share price upside. In fact, my new target price is 200p to give Pure Wafer a market capitalisation of £58.4m pre-cash return, or 4 per cent less than its net asset value of £61.2m. And remember included in the net asset value figure is a cash pile worth £55m and property, plant and equipment worth £6.1m.
Frankly, there looks little downside risk here because if Pure Wafer’s share price continues to trade below its cash pile post the forthcoming capital return then I can see predators being attracted by the prospect of getting their hands on the leading wafer reclaim company in the US for a bargain basement price. Trading has been strong post the June fiscal year-end and the board expects this trend to be maintained throughout the current financial year and beyond.
Please note that I last advised running profits at 162p (‘Bumper cash returns,’ 13 August 2015) after the share price hit my previous target price of 150p, having quadrupled in the six-month period after I highlighted the glaring valuation anomaly on offer (‘Engineering growth’, 5 February 2015). But in light of the better than expected insurance payout, higher net funds figure, and positive trading update, a recommendation upgrade is in order.
Trading on a bid-offer spread of 171p to 175p, giving Pure Wafer a market capitalisation of £51m, I rate the shares a buy and have a new target price of 200p.
Please note that I have written articles on three companies today, and on 13 companies in total since the start of last week, all of which are listed in chronological order below.
MORE FROM SIMON THOMPSON...
I have published articles on the following 45 companies in the past four weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ MS International: Buy at 180p, initital target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p (‘Valuation anomaly worth exploiting’, 20 October 2015)
■ Greenko: Hold at 87p, new target 100p (‘Greenko’s cash return’, 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p (‘An elegant investment’, 20 October 2015)
■ Simon Thompson's 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
