PV Crystallox Solar PVCS
October 01, 2012 - 10:08am EST by
2012 2013
Price: 0.08 EPS $0.00 $0.00
Shares Out. (in M): 406 P/E 0.0x 0.0x
Market Cap (in $M): 50 P/FCF 0.0x 0.0x
Net Debt (in $M): -159 EBIT 0 0
TEV ($): -109 TEV/EBIT 0.0x 0.0x

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  • Solar
  • Europe
  • Discount to Liquidation Value


All numbers below in Euros. Stock is quoted in London and is currently trading at 7.7p per share for a market cap of £31m (E40m)
PVCS is an extreme value situation with a few wrinkles. The company has historically been involved in manufacturing solar wafers for sale to solar panel manufacturers. The operations are a polysilicon plant in Germany (polysilicon is the raw material), an ingot production plant in UK and an inhouse wafering operation. The industry has been dire over the last few years and prices in raw materials and wafers have fallen precipitously. Currently the company's German polysilicon plant is idled (though at material onging operating cost) and they have reduced costs in wafering and ingot manufacturing. The short story, to whet your appetite, is that pro forma net cash is E122m, vs E40m market cap with total liabilities (though see below for R&D grant and onerous contracts) of probably E20m. What's not to like? Well.....
This is quite a complex story but there are three key drivers of value from here:
1. PVCS signed substantial 2/3 year contracts to buy raw polysilicon from two main suppliers at prices well above current spot. It no longer wants this polysilicon. So the question is how do they get out of these contracts with minimum cash outflow. They are currently renegotiating poly silicon volume and price every 6 months and selling it on the spot market. The suppliers are running down cash prepayments PVCS has previously made and together with the proceeds from the spot sales this is currently cash neutral (provided you ignore the fact that a cash prepayment is being run down). However, the interesting thing is that these contracts are with limited liability subsidiaries with minimal assets (and little or none of the company's cash) and they could walk away from these contracts. In practice management are hoping to settle. They will hand over the cash prepayment (which not surprisingly they aren't going to get back) and maybe a few million more. This is key because the current balance sheet consolidates an estimate of these onerous contracts of around E51m (gulp!). If they manage this aggressively they could get away with E5m.
2. They have a strategic decision to make over Germany and more generally over the future of the business. Germany is losing cE10m pa in idle operating cost and a decision needs to be made over whether they run this loss and hope for price recovery or whether they close up (also see below for R&D grant). They are currently in 'strategic review' and the signs are that they will bite the bullet and close. More generally a decision has to be made on the rest of the business. Do they liquidate and sell off the interesting ingot operation to the highest bidder or do they hunker down, minimise costs and hope to ride out the dire market?
3. When they built the German plant they received an R&D/industrial grant of which E24m or so is still outstanding. This grant is a liability of the German subsidary which has no cash. Again they could walk away but would hope to settle with the German authorities if possible. The best case would be that they can sell the subsidiary for a nominal sum.
Liquidation value: The best case liquidation scenario would be aggressive negotiation on supplier and grants, say at a cash cost of E10m. Closure of Germany (E5m), sell off the ingot business which I am told has good technology for say, er, nothing, close the rest for cash cost of E10m, another E10m of cash losses (though they are only running at E5m/E6m pa at the moment ex Germany) while you do it. Liquidate the working capital and that would  leave cE140m of cash to return to shareholders. This is around 3.5x the current market value. A very, very big margin of safety.
There is potential further upside from a settlement with a reneging customer, but this is uncertain and would be icing on the cake.
Clearly there are a number of moving parts here but the big risks are:
1. Management decide to hold on for a recovery. Wouldn't be the end of the world if they close Germany and just hunker down with the ingots but this might involve continuing the supply contracts (at cash losses or at best risk of cash losses if spot goes against them) and generally not returning surplus cash. Shareholders have voted the chairman off the board, voted down executive pay and generally have made their feelings clear however current management have 13% of the capital with ex management another 15% so making the liquidation or quasi liquidation happen against their will might be difficult. This is the key risk.
2. Inability/litigation to prevent them exiting supply contracts and/or R&D grant. Management has been pretty categorical that they can walk away from both of these if they wish but, hey, stranger things have happened.
3. Tax, there is a tax bill to pay for a settlement from a reneging customer. The tax bill from this is complex. Best case is about zero, by the time they have offset some tax assets, worst case is cash outflow of E20m. The worst case doesn't really hurt the investment case given the margin of safety though clearly it is (yet) another sizable moving part.
Summary: massive margin of safety and upside if they move into liquidation/quasi liquidation. Risk of value destruction if they don't.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Strategic review in process and a decision is promised in H2 2012.
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