There were several positives in the announcement and, in particular, the potential financial upside in a legal case PV Crystalox has been forced to instigate against a client, one of the world's leading photovoltaic companies, who signed a long-term supply contract in 2008, but has failed to purchase wafers in line with its obligations under the contracts since 2013.
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. Bearing this in mind, and with the caveat that a positive outcome is far from certain, chairman John Sleeman believes that “the value of any award could be a multiple of the company’s market capitalisation if our claim is upheld.” PV Crystalox is also seeking recovery of €400,000 costs it has incurred to instigate this action.
The other major point to note is that there is now a positive divergence between the spot price of wafers and the company’s cash cost of production, so much so that it now makes financial sense to turn inventories of polysilicon into wafers rather than trade surplus polysilicon in the secondary market as PV Crystalox has been doing in recent years. Polysilicon stocks were worth €20.3m (£15.9m) at the end of last year, or 90 per cent of the company’s total inventories. Interestingly, chief executive Iain Dorrity says that "a recent report from Bloomberg New Energy Finance highlights that while considerable surplus capacity exists in the polysilicon, cell and module sectors, the wafer sector could be a potential bottleneck with capacity closely matched to demand. Consequently the tight wafer supply situation and higher wafer prices are expected to persist in the short term".
The other consequence of a stabilising in wafer pricing, and subdued polysilicon spot prices, is that there is no need to make an onerous contract provision on future contracted polysilicon deliveries as these can be turned into wafers at a positive gross margin. As a result investors can now focus on what is a relatively clean balance sheet with PV Crystalox’s net funds of €12.7m, total inventories of €23.7m, trade receivables of €5.7m and deposits made on polysilicon feed worth €5.2m accounting for most of the company’s net asset value of €44.8m, or 21.9p a share. Cash and inventories are worth 17.5p a share at current exchange rates, or 75 per cent more than PV Crystalox’s share price.
The point being that if current market conditions persist, and the company is able to turn its polycilicon stocks into cash through wafer manufacturing, and at above the depressed level these assets are held in its balance sheet, then there could be significant upside to the shares. Add to that the possibility of PV Crystalox winning a major financial award later this year, and the risk still points to a decent recovery in the share price.
Trading on a bid-offer spread of 9.75p to 10p, I continue to rate PV Crystalox’s shares a speculative buy.
Please note that I have published four columns today, 10 so far this week, and 19 since Monday last week, all of which are listed below. I am still working my way through a number of results announcements and will endeavour to update my views as soon as possible.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 March 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 March 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 March 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 March 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 March 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 March 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 March 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 March 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 March 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 March 2016)
■ Miton: Buy at 30.5p, new target 38p (‘Riding earnings upgrades’, 22 March 2016)
■ Inland: Run profits at 86p, new target 95p (‘Valuation surge boosts Inland’, 22 March 2016)
■ Pittards: Crystallise loss at 71p (‘Subdued demand hits Pittards’, 22 March 2016)
■ French Connection: Buy at 43p ('Stakebuilding gathers pace at French Connection', 22 March 2016)
■ Safestyle: Run profits at 276p (‘Exploiting a window of opportunity’, 23 March 2016)
■ PV Crystalox: Speculative buy at 10p (‘Lights start to glow at PV Crystalox’, 23 March 2016)
■ Arbuthnot Banking Group: Buy at 1340p (‘Banking on a banking duo’,23 March 2016)
■ Cenkos Securities: Sell at 130p ('Cenkos profits slide', 23 March 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
