But the global photovoltaic industry environment deteriorated further last year which explains why shares in PV Crystalox Solar are trading on less than half my recommended buy in price, and below the 9.5p level at which I last updated the investment case at the time of the interim results (‘Planning for success’, 3 September 2015). In those half year results, PV Crystalox reported a pre-tax loss of €9.5m (£6.9m), and burned through €8.5m of cash in the six-month period, so mindful of the need to protect shareholder value, the board initiated a review of the business. And that’s why yesterday’s announcement sparked my interest.
Firstly, spot prices for wafers, the company’s primary product, have shown some modest recovery in recent months while the price of polysilicon, the key raw material used in photovoltaic wafers, has fallen to historical lows and is still declining. The net result of these divergent trends is that wafer prices now exceed PV Crystalox’s cash cost of production. Moreover, as the company has significant polysilicon inventory this means that conversion of this stock into wafers is now a more favourable option than trading the surplus polysilicon at market prices as the company has been doing the past few years.
Bearing this in mind, at the end of June 2015, PV Crystalox had inventories of €27.9m on its balance sheet, or £21.6m at current exchange rates. It also had net funds of €17m, or £13.2m using a sterling euro exchange rate of £1:€1.29. This means that stocks and cash accounted for 89 per cent of its net asset value of €50.3m. Or put it another way, before accounting for second half trading losses, the company’s market capitalisation of £12.8m is just a third of its last reported net asset value of £39m.
That could prove to be a bargain basement valuation for a company that can now offload its polysilicon assets by manufacturing them into wafers without burning through its cash pile. It’s also worth pointing out that having previously been burdened by long term polysilicon purchase contracts with prices way in excess of open market prices, PV Crystalox concluded its obligations under the largest of these legacy contracts when it took delivery of the final shipment of polysilicon under that contract in December 2015. Shipments under the one remaining polysilicon purchase contract are scheduled to continue until late 2018. Bearing this in mind, the scheduled quantities for delivery under this contract are in line with the company’s current production volumes.
The good news doesn’t end there as at the end of last year the French government awarded 800MW of photovoltaic projects which must be completed within a two year period. The carbon footprint of these projects was a critically important factor in the contract awards. Accordingly, PV Crystalox’s board believes it’s well placed “to benefit as the low carbon footprint of its wafers is more favourable than product from competitors based in China and Taiwan.”
Potential windfall at International Court of Arbitration
And there could be further good news to come over the summer too. That’s because the company has one outstanding long term sales contract in place with one of the world's leading photovoltaic companies, but which has failed to purchase wafers in line with its obligations under the contracts. Despite extensive negotiations PV Crystalox has been unable to reach a mutually acceptable agreement and was forced to file a request for arbitration in March 2015 with the International Court of Arbitration of the International Chamber of Commerce. The hearing of the arbitral tribunal is scheduled to take place in Frankfurt in July 2016 and a positive judgement would undoubtedly lead to a cash windfall for PV Crystalox, not to mention recovery of the €400,000 costs of this action which acerbated the first half operating loss last year.
It’s worth flagging up too that in PV Crystalox’s last set of results it booked an onerous contract provision of €7.4m, reflecting the difference between the contracted price under the purchase contracts of raw material, and the anticipated selling price of the end product. However, given that the end product price has now risen above the cash cost of production, then this would indicate a fall in the onerous contract provision too. In other words, given this €7.4m provision is reflected in the balance sheet as a liability, and auditors have taken this into consideration when calculating the company’s net asset value, then any unwinding of the provision will be accretive to shareholders.
The bottom line is that in light of the improvements in the market environment, potential to turn inventory into wafers without burning through cash, and scope for a positive judgement in the International Court of Arbitration, then it’s clearly in the best interests of shareholders for the board to extend the strategic review. And given that the shares are backed completely by cash on the balance sheet, then this gives a free ride on inventories worth 13.5p a share.
In the circumstances, I feel there is scope for the share price discount to book value of 24p to narrow markedly in the months ahead if newsflow continues to be positive, as seems a realistic possibility. So, if you can stomach the risk, PV Crystalox’s shares are worth buying ahead of the next trading update alongside the full-year results on Thursday, 17 March 2016. Speculative buy.
MORE FROM SIMON THOMPSON...
I have written articles on the following 64 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p (‘Book into a trading play’, 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p (‘Lights brighten at PV Crystalox Solar’, 11 February 2016)
■ 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
