However, a deterioration in the global photovoltaic (PV) industry environment sent the shares tumbling, so much so that when I updated the investment case at the start of this year they were trading on less than half my recommended buy-in price. All was not lost, though, as I strongly felt there were sound reasons to keep the shares on a speculative buy recommendation ('Lights brighten at PV Crystalox', 11 February 2016). They have rallied by almost 70 per cent from that low point. Moreover, there is potential for further significant gains too.
Firstly, a recovery in spot prices for wafers, the company's primary product, and softer prices of polysilicon, the key raw material used in photovoltaic wafers, meant the company could offload its polysilicon assets by manufacturing them into wafers without burning through its cash pile. This enabled the company to return to profitable production and turn a €9.5m (£8.12m) loss in the first half of 2015 into a profit of €4.7m this time around.
Not that anything is ever straightforward in the wafer industry as wafer prices have in the past three months plunged by around 15-20 per cent to hit historic lows. Furthermore, having troughed in the first quarter of 2016, polysilicon prices have now surged in the order of 15-20 per cent, taking them back to levels last seen in mid-2015. A slowdown in PV installations in China has been a key reason for weaker demand, the net effect of which is to make wafer production uneconomic again and force PV Crystalox's board to consider measures to protect shareholders' interests.
Bearing this in mind, the company has successfully reduced its polysilicon inventory in the first half of 2016, so much so that inventories have more than halved in the past 12 months to €12.7m and now only account for 27 per cent of net asset value of €45.5m. The conversion of stocks into cash has had the effect of almost doubling net funds to €24.8m, a sum worth 13.25p a share at current exchange rates. This means that, with the shares being offered in the market at 13.5p, they are priced in line with cash and on a near-50 per cent discount to book value of 24.2p. True, the modest valuation reflects the severe current pricing pressures in the industry and the fact that PV Crystalox's purchase price on its one remaining polysilicon supply contract, which runs until 2018, is above the current spot rate. That said, the supplier is supportive and has permitted a deferral of a significant amount of scheduled shipments in light of current wafer pricing.
A major catalyst for re-rating
Of more interest to the short-term direction of the share price is the likely resolution of a contract dispute between PV Crystalox and one of the world's leading photovoltaic companies. The evidentiary hearing for arbitration is set to be heard by the International Court of Arbitration of the International Chamber of Commerce in three months' time, and a judgment is expected in early 2017. PV Crystalox has one outstanding long-term sales contract in place with the photovoltaic company, but the latter has failed to purchase wafers in line with its obligations. Despite extensive negotiations PV Crystalox's board has been unable to reach a mutually acceptable agreement and was forced to file a request for arbitration in March 2015. The hearing of the arbitral tribunal was scheduled to take place in Frankfurt in July 2016, but was postponed on the request of the customer until this autumn.
It's well worth pointing out then that in the event of PV Crystalox's claim being upheld, the board anticipates compensation that "could be a multiple of the company's market capitalisation". The point being that, with PV Crystalox's share price trading in line with cash, upside from the International Court of Arbitration ruling is effectively in the price for free. Admittedly, this is a speculative recommendation given the downturn in wafer pricing, but with the shares trading so far below book value, the majority of which is stock, cash and property, I feel they are worth buying. Buy.
MXC Capital tender offer
Aim-traded MXC Capital (MXCP:3.24p), a technology-focused merchant bank run by a management team that has been successfully backing investee companies they represent as well as earning lucrative advisory fees, has announced a tender offer. It's one worth participating in if you followed my advice to buy the shares at 2.65p ('Deal makers', 31 May 2016), or for that matter when I updated the investment case at 3.02p ('Playing the flotation game', 3 Aug 2016).
MXC plans to use £3m of its £15m cash pile to buy back 83.3m shares at 3.6p each on the basis of one share tendered for every 41 held. That cash pile is far higher than I had forecast. The tender offer has now opened and ends on 9 September and is available to all shareholders on the share registrar when it closes. Of course, there is nothing to stop you from tendering your shares to MXC and then buying them back in the open market, the benefit of which is to lower your average buy-in price. It's certainly one way of rewarding shareholders for the profits the company has been making on its portfolio.
For instance, MXC has cashed out £10.4m by selling 5.8m shares in Redcentric (RCN:180p), a UK IT managed service provider to bank a £7m gain ('On the acquisition trail', 5 Jul 2016). MXC still holds almost 50,000 shares, worth £90,000, and owns call options over 1.7m shares with a strike price of 32p, and a further 7m call options with a strike price of 80p. These options are 'in-the-money' to the tune of £9.5m. MXC also successfully backed the Aim flotation of Tax Systems (TAX:79p), a leading supplier of corporation tax software to the large corporate sector and the accounting profession in the UK and Ireland. MXC subscribed for £8.7m-worth of new shares as cornerstone investor in a £45m placing and holds warrants over 6 per cent of the 76m shares in issue, the majority exercisable at 67p, but some at 61p. These warrants are showing a paper profit well over £500,000 and MXC's holding of 15.2m Tax Systems' shares is now worth £12m.
So, with MXC's dealmakers making bumper returns for shareholders, the general stock market environment now more favourable for corporate activity, the company cashed up to do more deals, and the shares rated on a modest premium to book value, I continue to rate them a buy on a bid-offer spread of 3.16p-3.24p. Please note that the official spread is wider, but be disciplined when placing your orders as it's easy to deal between the spread in sensible bargain sizes.
Faroe Petroleum's slick deal
About 18 months ago I highlighted an opportunity in Aim-traded Faroe Petroleum (FPM:68.75p), an independent oil and gas company primarily focused on exploration, appraisal and production opportunities in Norway and the UK ('A slick operator', 5 Feb 2015). The shares were priced at 75p at the time and I had a target price of 94p. In the event the price came within pennies of that objective in April and July last year, before the subsequent oil price plunge dampened investor interest in the sector. I last rated Faroe's shares a buy at 86p ('A slick investment', 25 Jun 2015), a level that has yet to be seen again as share price rallies in both April and July this year petered out at the 82p level.
However, with Faroe's share price slightly below my initial buy in price and also adrift of July's 70p placing price, a fundraising that raised £66m primarily to fund the acquisition of the production assets of DONG Energy, I feel that the risk:reward ratio is skewed to the upside. Not only are the shares trading well below core net asset value of 84p a share, according to analyst Werner Riding of brokerage Peel Hunt, but it's clear investors have an appetite to support small-cap oil companies willing to exploit selective acquisition opportunities in the current environment.
For instance, the five Norwegian North Sea producing oil and gas fields acquired in the DONG Energy transaction added 8,000 barrels of oil equivalent (boe) per day to Faroe's production and have lifted its 2016 average daily production to between 15,000 and 17,000 boe. The $70.2m (£53.2m) cash consideration paid equates to a price of $3.50 per boe based on 2P reserves, and $2.30 per boe based on 2P reserves and 2C resources, little over a third of the average price paid in Norwegian oil and gas asset deals in the past two years. Estimated unit operating expenditure is around $19 per boe, so with Brent crude recovering to $50 a barrel, then the acquisition will bring in substantial cash flow to support Faroe's promising development programme.
It's worth noting too that Faroe retains a healthy balance sheet, with forecast year-end net cash expected to be around £88m, or 24p a share, thus offering scope for further exploration acquisition opportunities. And that's not being factored in to the share price, which is 20 per cent below core net asset value and on a near-50 per cent discount to risked net asset value after factoring in appraisal and development upside. The shares have obvious recovery potential, albeit largely driven by the future direction of the oil price. Speculative buy.
A boot'ful investment
The key takes for me in the half-year results of small-cap property and construction company Henry Boot (BHY:208p) was not that it's trading ahead of previous expectations after land sales were completed earlier than expected ('Boot'ful land sales boost Henry Boot', 9 Jun 2016), but that activity and deals are progressing as envisaged with little negative impact since the Brexit vote.
Land development division Hallam Land secured planning consent on more than 4,100 plots in the six-month period and now has 15,183 plots across 47 sites for sale, and a further 9,500 plots across 18 sites subject to planning applications. Pricing levels since the EU referendum have been maintained and the £111m book value of land investments, held at the lower of cost or net realisable value, affords substantial asset backing. A doubling of Hallam Land's first-half operating profits to £13.3m, and a 50 per cent-plus rise in profits from commercial property developments were the key reasons behind Henry Boot's pre-tax profits and EPS rising by half to £20.8m and 11.9p, respectively. Full-year EPS expectations of 20.3p support a raised payout of 6.5p a share and look well within reach.
Moreover, as the pre-let commercial development pipeline completes over the next few years this will result in the company being cash-flow-positive, thus placing it in a strong position to exploit any acquisition opportunities. In any case, net debt is already comfortable at 25 per cent of shareholders' funds, so the company's balance sheet is hardly overgeared. Henry Boot also holds £118m of income-producing investment property, so offering further asset backing, and a de-risked commercial development pipeline, both of which are supportive of decent earnings growth in the years to come.
True, the shares have yet to make any meaningful headway on my 205p buy-in price ('A bootiful investment', 19 Feb 2015), but I still believe this is a rock solid company and one where my heavily discounted sum-of-the-parts valuation of 280p a share is warranted. Buy.
