PV Crystalox Solar (PVCS.L) – Liquidation – 39% Upside

Current Price: £0.60

Book Value: £0.79 - £0.83

Upside: 39%

Expiration Date: TBD

H1'19 report

This idea was shared by Colin.

 

The company is listed on LSE with its shares quoted in British pounds, however, the financial reporting is done in Euros. To avoid confusion all the numbers below are in Euros. Current share price is equivalent to €0.71.

Crystalox Solar is net-net with €1.32/share in cash (as of June'19), minor operating/tax liabilities and freshly reorganized cutting services operations that management is looking to sell. 80% of previous cash balance was recently distributed to shareholders, so the chances are high that full liquidation is in the cards.

BV per share was  €1.15 as of June'19. Taking into account expected cash burn since then, current BV/share stands at c. €0.94/€0.99 under conservative/base scenarios, resulting in 32%/39% upside.

On top of that there might be further upside from the expected recoveries from an insolvent customer (might take two years - more details below), sale of the operating business, value of the LSE listing and fully depreciated PPE.

Major risks are:

  • Delisting - management considers it as one of the options.
  • Timing - ongoing cash burn reduces the upside. The management might delay the sale of remaining operating assets for some reason - one of the possible cases is that they will wait until the obligations from the insolvent customer are received.
  • No buyers of the operating business - the management has already tried selling the operations in Germany in 2018, but failed, however that was before reorganization.

On a positive note, management stated numerous times that they want to maximize the value of their public listing and, moreover, noted that they might buy the business themselves. Existing cash balance should be sufficient till about the end of '20 before this trade breaks-even.

 

Short Background

Crystalox Solar used to be a silicon wafer manufacturer for the photovoltaics industry (solar panels). It had several facilities in UK and Germany, however due to poor market conditions and increasing pricing pressures from China, the company carried out a major business reorganization - shut down operations in UK in 2017 and transformed the business in Germany by completely exiting PV manufacturing (2018), closing one of the two remaining production facilities and consolidating operation into the remaining one (H2'2019). After exiting the UK operations and PV manufacturing in Germany, management hoped that a buyer would emerge for the remaining assets, however due to the unfavourable market conditions that did not happen.

So far the company has still retained its silicone wafering capabilities and periodically provides this service to a customer in Germany (limited contract). Moreover, PVCS is also continuing its funded PV related research, which brings c. €0.4m of annual grants (€0.5m in '18).

Currently management is trying to switch to a slightly different business of cutting services (silicone, glass, quartz etc.) for optical, medical and semiconductor industries in Germany. The cutting trials on several materials were successful and apparently some business relationships have already been established, however management notes that the efforts are burdened by poor market conditions in the semiconductor industry.

 

Cash burn

During H1'19 PVCS operations consumed €1.3m of cash, however the number was likely elevated due to ongoing business restructuring. Normalized cash burn (excluding one off expenses) is probably much lower. Moreover, further costs savings should be expected due to consolidation of operations into a single facility (from 2020 onwards). Keeping this in mind, the annual cash burn of 2 x H1'19 levels should be conservative enough. I am assuming €2m annual cash burn for the base case.

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So at the end of this month (Jan 31st, 2020) PVCS should have a BV/share of €0.94-€0.99, which currently provides 32-39% upside.

 

Management's Comments

In 2018 annual report management was straightforwardly stating that they are looking to maximize the value of their public listing and are open to selling the business in Germany if the offer was provided or that they might even buy-out the remaining operations themselves:

In parallel we will aim to complete the transformation of the manufacturing operation in Germany. A sale to a third party or a transfer of the business to the existing management team would be given consideration if an offer was made.

Following the cash return, the Board will consider the options available to maximise any value from the listing of Group’s shares on the Official List.

However, the tone in H1'19 report got more vague. Although the sale of operations was still mentioned as one of the options, management also discussed the possibility of delisting by noting that it would not even require any approval from the shareholders, which is concerning (even stranger is putting value maximization from the public listing and possibility of delisting in the same sentence):

As part of the continuing resolution of the Group's affairs, the Board is looking to reduce overheads further and is considering various options including streamlining the management team, restructuring the Board and reducing directors' salaries. The Board will continue to explore the options available to maximise any value from the listing of Group's shares on the Official List, while a further limited cash return and possible cancellation of the listing remain under consideration as alternative courses of action. It should be noted that as the Group is a Standard listed company no shareholder approval is required for delisting.

 

Further Points

There also might be possible additional upside from:

  • PVCS has a fully written-off $1m receivable from an insolvent customer. In H1'19 it was stated that there's a good chance the funds will be eventually payed out, however the process might take up to two years. This might delay the business sale and shareholder distributions as management might want to wait for the resolution on the case.
  • The company has €23m of fully depreciated PP&E on its balance sheet - there might be some liquidation value left in it as well (or combined with current business operations), although unlikely to be much as most the equipment was likely retired/disposed with closure of photovaltaic operations back in 2018 and during recent business consolidation.

The data on major shareholders is outdated (annual report '18):

  • CEO holds over 10% of the stock and another 10% is owned by the former technical director Barry Garrard.
  • About 30% is controlled by private equity investment firms. Previous largest shareholder Schroder Investment Management has reduced its stake in PVCS during H1'19 from 14% to 8%.

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6 COMMENTS

  1. Writser

    This was very attractive just after the large return of capital was announced and I had a large position. You were basically buying the stub for free. I sold the stub at around 0.66 GBP last year after the (imho) very disappointing H1 2019 release.

    I don’t think it is super attractive anymore and I think you pointed out the crucial problem: “Existing cash balance should be sufficient till about the end of ’20 before this trade breaks-even”. They failed to sell their German sub in 2018 and are now trying to pivot into a new business. There is no clear plan to shut down, to return capital, to do anything, basically. And in the mean-time their cash will evaporate pretty quickly.

    They might get lucky with a quick sale and there might be some residual value in their PP&E. So of course I could be completely wrong. But at this point in time it doesn’t look super attractive to me. Decent chance they’ll burn a bit of cash trying to revive the German business and/or doing nothing.

    The German subsidiary manager even sold some shares in the beginning of this year.

  2. Ilja

    Several updates from the annual results:

    – The company now states that the sale of the business is the ultimate goal, however it seems that it will be postponed by about a year: “As our ability to accelerate the liquidation process is limited and also economic considerations make such action unfavorable, our focus is on minimizing the cash burn during the next 12-18 months while the outstanding issues are resolved”.

    – Cash burn was better than expected and at Dec’19 BV stood at ~€1.03/share. The company intends to cut the costs even more (50% salary cut for the directors and closure of the UK office). Assuming €1.3m annual cash burn, the book value of the company should be valued at ~€0.98/share (£0.89/share) as of March’20. At the end of 2020 BV is estimated at €0.85/share and €0.76/share at June’21. From the current price that would be 93% and 73% upside respectively.

    – In Q3’20 PVCS will do a €2.2m tender offer, which is partly conditioned on €0.8m receivable. If I understand correctly is the same receivable from the insolvent customer that the management has previously stated will take 2 years to fully recover (now it seems to be expected in H1’20). It is noted that if the €0.8m is not received, the cash return to the shareholders will be adjusted accordingly.

    – After the cash return the company will cancel its official listing.

    Overall the news are not very positive as the management has obviously chose their own self interest over the shareholder value. Instead of closing down the business and returning the cash straight away, they will drag the whole process for another year, while returning only a tiny portion of the cash through the tender offer. Nonetheless, at the current price the potential return is material, even with the prolonged timeline.

    1. ryanwalex

      Isn’t this a bad thing? I don’t understand. 70% of market cap means 70% of what you own in the stock and then they delist. So there are no further gains. What don’t I understand here?

  3. dt

    As expected, due to ongoing tender offer the shares of PVCS recovered and now trade close to the tender price (55 pence per share). Any further recovery after the tender is very questionable and will be driven entirely by the sale of the operating business (so far management failed to complete it).

    I am closing this one out at 12% loss. Submitting shares for the tender offer (expires on the 9th of September) might result in a slightly better return, however, there is a risk of ending up with unlisted security in case the tender is prorated.

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