REC Silicon REC NO
January 30, 2015 - 10:23pm EST by
2015 2016
Price: 1.65 EPS 0 0
Shares Out. (in M): 2,350 P/E 0 0
Market Cap (in $M): 496 P/FCF 5 10
Net Debt (in $M): 45 EBIT 0 0
TEV ($): 550 TEV/EBIT 0 0

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  • Hidden Assets
  • NOLs
  • Solar
  • low-cost producer
  • High Barriers to Entry, Moat
  • Discount to Liquidation Value
  • Negative Sentiment
  • replacement value


REC Silicon (“REC”) is hated (oil sell-off augmenting solar uncertainty + magnified by China trade tariffs that will initially impact ~40-45% of REC’s volumes), under-appreciated (lowest cost position on global cost curve at sub-$12 / kg versus other tier 1 that are 50% - 100% higher up on the curve, significant hidden asset value in the form of JV partnership(s) + NOLs + valuable technology / FBR that makes REC a strategic / coveted asset) and under-valued (lowest cost producer globally with capital and technology barriers to entry, trading 15-20% of replication value).  At current levels (1.60 – 1.70 NOK / share or the equiv of $0.21 / share), REC is a compelling m-term risk / reward long proposition, with total return potential of >100% over the next 12 – 24 months (base case PT of ~3.50 and that assumes China tariffs remain in place ... and upside case of >5.00 NOK / share assuming China tariffs fall away at some point in late 2015E – 2016E).  The long thesis on REC is NOT predicated on demand recovery as too unknown + too complex, but rather supply removal. REC’s low cost position + bottom-of-cycle conditions (current poly-silicon prices are below all tier 1 suppliers with the exception of REC), supply will be removed over the next 3 – 12 months to balance w/ demand.  Over the m-term, I’ve assumed $22 / kg of normalized pricing which is still within the mid-range of tier 1 suppliers. 

REC is generally mis-perceived for what it was 5-yrs ago (over-leveraged balance sheet + owning hodge podge of high cost mostly European mid-stream solar facilities), and not for what it has become today as the biz profile has changed dramatically over the past 5-years.  After spinning off its solar segment in October 2013 (subsequently sold), REC is a pure-play poly-silicon supplier with ~20k tons of capacity (~10% of the “low-cost” / tier 1 industry supply).  Unlike the rest of the solar supply chain, poly-silicon is asset-intensive (~$75k per ton for Siemens and >$90k per ton for FBR which is REC’s technlogy) and time intensive (>1.5 years of lead-time) to build new capacity.  Compared to the over-leveraged BS of years ago, net debt will likely finish the year at a reasonable $120MM USD (and NOLs will have $~75MM in NPV value).


Over the past several years, poly-silicon prices have collapsed from >$70 / kg to $15 / kg in early 2013.  Prices rebounded to $22 - $23  / kg in 2014 but have subsequently fallen off below $18 / kg as of late.  At <$18 / kg, the global cost curve (ex-REC) is FCF negative. Regardless of solar end-market demand (frankly too unknown, too volatile, too complex), poly-silicon supply will be removed at current prices.  Pxs will ultimately rise to levels that incentivize higher cost capacity to come on-line (>$20 / kg); over the longer-term, assuming solar demand continues to grow, poly-silicon prices must be sustained in the $22 - $25 / kg to incentivize new supply.


Regarding valuation, REC trades at ~15 – 20% of its replacement value.  Even in comparison to inexpensive Chinese brown-field capacity that costs $30 - $50k per ton using Siemens technology, REC trades at a steep discount ($15 - $20k per ton).  At $22 / kg “normalized” prices +assuming 40 – 45% of REC’s volumes are sustainably impacted by Chinese tariffs (i.e. putting the equivalent cost of REC product at ~$18 – 19 that goes into China), REC trades at less than 4x EBITDA – capex.  If the Chinese tariffs fell away over the m-term, REC trades at less than 2x EBITDA – capex.  Re: the downside risk, even at current poly-silicon prices, REC will generate FCF in the tune of >$30MM.


Key risks include: (a) solar end-market demand stays lower for longer, (b) poly-silicon supply stays online even during CF negative period, (c) and high-cost poly-silicon supply comes back on-line at  rrational price levels (i.e. sub-$20 / kg levels)


DISCLOSURE:  This is not a recommendation to buy or sell shares.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


poly-silicon supply removal, further monetization of FBR technology expertise, clarity on China tariffs ... improved visibility on global solar demand

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