PV Crystalox Solar: the struggle continues

Last year I decided to increase my position in PV Crystalox Solar because it was trading at just 40% of net current asset value (now at 47%). The company is struggling because of (Chinese) production overcapacity of photovoltaic wafers (its main product). At the same time, it was locked in an unfavorable long-term contract to buy polysilicon (the main material that is used to create wafers). PV Crystalox Solar released preliminary results for 2015 last week that show us exactly how bad 2015 was.

I expected last year that they would burn through roughly €10 million in cash, and they actually had a negative operating cash flow of €12.9 million. As a result, they have €12.7 million of cash left while the company has a €21.0 million market cap. The good news is that this amount is now expected to grow because they still have an inventory of €23.2 million that consists largely of polysilicon (€20.3 million) that they now can turn into wafers without losing money. Because of the “favorable” market conditions the company has decided to extend the strategic review period. If they are unable to start operating profitable they will liquidate, and that is what keeps the stock attractive despite the cash burn so far. From the latest presentation:

PV Crystalox outlook 2015

What I also found very noteworthy was the following statement in the letter of the chairman:

In view of changes in market conditions during recent months that have positively impacted the Group’s competitive position the Board considered it sensible to extend the review period. This extension will also provide time to take full account of the outcome of the ongoing dispute with a long term wafer contract customer where we have filed for ICC arbitration.  The judgment of the arbitral tribunal is expected later in the year and while the outcome is uncertain, the value of any award if our claim is upheld could be a multiple of the Group’s market capitalisation.  

In previous annual reports there was talk about this dispute, but then the expectation was that the value of the claim was a lot smaller. In 2014 the company received a €8.7 million payment for a similar dispute with another customer and wrote that the magnitude of an eventual cash payment would be significantly smaller for the last remaining dispute. Apparently that has now completely changed since the market cap of PV Crystalox Solar is more than €20 million, and the eventual award could be a multiple of that!

Because of this, and the large discount to NCAV, I think that PV Crystalox Solar is still a very attractive investment were most eventual outcomes range between good and fantastic. Even if the company continues to lose some money in the near future and is eventually liquidated investors could make a decent return given the current discount to NCAV. If the company turns around and starts making money and/or the large claim is awarded the outcome could be even better. I think the biggest risk is that losses continue to accumulate and that when the company is finally liquidated there is not a lot left. But so far I don’t think that’s very likely since management has been very clear about this plan. They are not desperately trying to keep a job while running down everything to zero.

Because of this I decided to add a little bit to my position once again.


Author is long PV Crystalox

21 thoughts on “PV Crystalox Solar: the struggle continues

      1. Brice

        Is liquidation a realistic outcome from the strategic review? Seems like they’re fishing for a reason to stretch it out and many boards find there’s ALWAYS just one more hope to avoid liquidation.

        1. Alpha Vulture Post author

          I don’t think that’s the case since they have already returned a large amount of cash to shareholders and sold their German production facilities, so that’s already a partial liquidation.

  1. Profplum

    The arbitration award that was cited in the chairmans statement was always potentially a big one, though this is the first time they have quantified it. I think you are getting confused with yet another payment which is due from a customer which went bankrupt. They expect this one imminently but it is said to be quite small.

  2. UKvalueinvestment

    Sorry, I meant to say – could you tell me where they have explicitly said that they might liquidate, if they have.

    1. Alpha Vulture Post author

      I don’t think they have explicitly used the liquidation word, it’s called a “strategic review”. Think last year they wrote something along the lines “it’s critical to establish if the company can establish a competitive position” which IMO implicates a sale/liquidation if they would be unable to do that.

  3. pietje

    Looked into this a little bit. The remaining polysilicon contract ships until late 2018. If the polysilicon price moves in the right direction this is great. However, if it moves in the wrong direction it becomes a liability again. If they want to liquidate they probably have to settle the contract in cash?

    I agree that the upside is there, but if market conditions become worse again I’m not sure there is much left for shareholders. The liquidation would probably take a while. nobody wants their PP&E, the polysilicon contract becomes a liability and the inventory drops in value. In the meantime they are burning cash on overhead and salaries. Also, chances are that the major pv customer in their ICC case is Sunedison or another player with financial problems.

    Finally, they’ve been talking about ‘strategic reviews’ and ‘protecting shareholder value’ since you started following this name on your blog. So far I haven’t been extremely impressed.

    Nevertheless it looks like a decent idea at current prices for a small position. I agree that the upside is there, but I don’t think that the range of all possible outcomes is [good – fantastic]. I’d say it is [terrible – fantastic] but skewed towards the right.

    1. Alpha Vulture Post author

      I think the remaining contract isn’t very big, but if they want to liquidate they probably have to pay some kind of breakup fee.

      And yes, I think it is indeed possible that the major PV customer isn’t in the best financial condition. Not sure what kind of probability we should attach to it, but getting a big settlement is certainly a bit of a long shot.

      And I think they have been doing fine wrt the strategic review and protecting shareholder value. They have returned almost E40 million in cash at the end of 2013, and since then most of the cash burn has been related to the big unfavorable polysilicon contract that is now finished. When I bought it the co had a E53 million market cap, it returned E36 million to shareholders and now the market cap is still E21 million. You could say that not a lot has happened in all those years, but so far they aren’t destroying value either I think.

  4. pietje

    On the other hand, they should probably be able to convert their inventory into cash quickly, given that it represents only a few months of revenue (and they can resell the raw material). But if they continue to spend ~7m on wages and ~4m on leases, legal, insurance and other costs per year the clock is ticking really, really fast if they have to liquidate.

    I haven’t reached a verdict yet.

    1. Alpha Vulture Post author

      I think they will convert a lot of their inventory into cash this year, and then going forward they should have a permanently lower level of inventory. They now still have a lot of excess polysilicon.

      And in a liquidation scenario I think it is reasonable to assume that most of those costs can be cut fast. You might need to pay severance fees and stuff like that, but when you have a company trading at less than 50% of NCAV there is some room for stuff like that before you actually start to lose money.

  5. Uk Value

    I believe the management are large shareholders. If so, they would be incentivised not to liquidate because by earning a large salary for as long as possible, they get to suck shareholder value from other shareholders. This could drag on for years.

    1. pietje

      But the value of their holding decreases. Would be more logical for them not to liquidate if they don’t own shares ..

  6. kp

    Hi, any thoughts on today’s results, a profit no less, reduced inventory, and the juicy settlement expected in 6 months…

    1. Alpha Vulture Post author

      Seems like a confirmation of the thesis. Liquidation option is back on the table, and a lot of inventory has been converted to cash while the settlement offers a nice upside optionality 🙂

  7. Zcaprd7

    Evidentiary hearing delayed until end of March 2017 – one assumes the mediation is another delaying tactic by the defendants – I suspect the end game is nigh – they don’t have anymore contracts to worry about and they should have converted all inventory to cash by then?


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