Blood on the silicon streets

I don’t know if hibernating PV Crystalox Solar can survive the down-cycle in wafer prices, but the market says it won’t. The shares are outrageously cheap, but then again they might be worth nothing.

What it does:

PV Crystalox Solar (PVCS) manufactures silicon wafers used in solar energy systems, and the ingots from which they are cut. Due to falling wafer prices it costs PVCS more to produce wafers than than the current market price so it has mothballed its new wafer facility in Germany and cut production of ingots in England. Wafer production through subcontractors in Japan is at 40% of previous volumes.

Category: cyclical

Falling wafer prices are due to oversupply, particularly from Chinese manufacturers, and inconsistent demand as European governments cut subsidies known as feed-in-tariffs for solar power installations. Customers are renegotiating or reneging on contracts fixed at higher prices, and going bust. The best near-term hope for the industry is Asia, where feed-in-tariffs are being introduced. Meanwhile PVCS has renegotiated prices and volumes with its polysilicon suppliers and is selling surplus polysilicon. By shrinking production and cutting costs it expects to survive the next twelve months.

What needs to happen:

Prices need to return to a level at which PV can profit before it runs out of cash.

What could go wrong:

competition
PVCS may be in a precarious competitive position: A boom in solar panel installations has brought new entrants into wafer production including polysilicon suppliers like MEMC and REC and low cost producers in countries like China, where solar cells are increasingly made and 80% of PVCS’ customers are located. The technology is also advancing and rivals are developing potentially more efficient materials, and methods of cutting wafers less wastefully from ribbons.

management
Chief executive Iain Dorrity joined the business in 1986 and owns 11% of the company, so he’s experienced and has more to lose than any other individual should the company go bust.

company finances
PVCS has net cash, but it used up '32.2m of its '54.8m balance last year, which explains the drastic measures to conserve it. The company says its cash position had improved by March.

valuation
The shares are trading at about a third of net current asset value, a proxy for liquidation value, but the concern is, as PVCS battles for survival it might use up the cash that makes it appear so cheap.

-

Verdict:

The Thrifty 30 does not hold PVCS, and I’m leery of adding a company which appears to face both cyclical and competitive pressures that might add up to extinction. I’ll consider it again if the valuation remains compelling and the company shows signs of recovery.

Notes:

• PV Crystalox Solar preliminary results, earlier annual reports.
• Analysis from Joachim Baumgaertner suggest smaller wafer producers are in weak competitive position and production from ribbons may be more efficient.
• Developments in solar technology.
• More on PV Crystallox Solar.