Added a 9% portfolio weight to PVCS at 21.68p a share.
This is a solar manufacturer which has just won an arbitration case against a customer who refused to pay up. This has been quite well covered in the Investors Chronicle and elsewhere so only a short post on this.
Their market cap is £34.7m. The arbitration win is worth £30m, less the cost of 22.9m solar wafers the company is supposed to supply. Looking at http://pvinsights.com/ the most that can cost is $0.80 a wafer, lowest $0.60. This gives a net payment of £30-£13.6/£10.2. This means a payment of £16.4 – £19.8m.
The award is supposedly binding – via the ICC. I don’t think there is any appeals procedure.
As at the interims the company held €27.86m worth of cash – or £24.5m.
They also hold €7m of inventories, from the 2016 Annual report some of this is silicon wafer – held at estimated selling cost. Depending on exact specifications I would imagine that could be used to settle the liability of 22.9m wafers the company is supposed to supply.
In addition they have €2.3m accounts receivable / prepaid expenses and a €2.9m payable.
If we net all this out we get to a further £5.6m.
So the valuation comes to £46.5m – £49.9 – less a bit (£2m?) for ongoing costs / wind up costs – so we are at £0.28 to £0.30p a share – or hopefully a 30% – 38% profit.
There might be more in this than that. They have £70.5m worth of plant – written down to £1.7m in the 2016 accounts. Is this really only worth that ? I suspect it could be worth more, but I dont have any real evidence of or for this.
There may be a marginally profitable business here – they made £1.3m EBIT in 2016. I personally would prefer the business wound up.
The company has also lost £88m since 2011. This may create tax loss carry forwards worth something to somebody. I am not an expert in this area at all so it’s only a hypothesis.
Shareholders – Management own 27%, Funds 30%, others the rest so management are not overly dominant and may act rationally in respect of the capital. The outcome of a strategic review is due shortly – hopefully this will act as a positive catalyst.
As ever comments are appreciated.
Deep Value Investments Blog 
Who was the counterparty to the contract?
I know but can’t tell you I’m afraid as I promised the guy who told me I would keep it quiet.
Sorry I can’t be more helpful.
They have enough cash on their BS to pay the award.
Someone else posted it above….
What makes you think they would liquidate?
It’s Taiwanese outfit Neo Solar Power. This info is in the public domain.
See http://www.ch-investments.co.uk/sites/default/files/downloads/ch-deep-value-investments-factsheet-december-2017.pdf
I didn’t know that…. fine if it’s already out there…
Why did you think they would liquidate / return capital?
Answer to this has disappeared…
Management have a decent size stake, they know they can’t compete with the Chinese – why waste their own money. Shareholders allowing them to sink more money into a bottomless pit is a clearly bad idea. Much of the shareholder base wants money back.
It is obviously a bit of a risk – and I have some concerns on this. These are solar guys so may want to continue…
Hi Rob,
I see that you have exited the position but I’ve been looking into this to try and workout a valuation and wanted to share.
On possible UK shutdown costs not reported at the interims:
UK facility = 50 employees.
Knocking off 5 to account for management and the odd employee kept on = 45.
Taking average tenure of 10 years, and an average age between 22 – 40 = entitlement to max redundancy pay of £14670 x 45 = €7.4m
Cost of escaping leases:
€2m?, based on reported UK lease commitments of £1.8m due over 5 years.
I haven’t ascribed any value to UK plant and machinery, although as you mentioned there could be gains realised considering book cost is £33m relative to net BV of £962k.
Balance sheet values:
PPE @ 80% = 921.6 (could be a lot more if German plant undervalued)
Cash = 27867
Tr Rec = 1103
Inv @ 80% = 5890
Prep Exp @ 80% = 1008 (mostly polysilicon inventory)
Total Asset Value €36790
Total Liabilities (€2985)
Arbitration award ~€34m (I think Neo Solar will pay)
Est. UK shutdown cost (€9m)
22.9m wafer supply €12180 (wafer spot price $0.75 x 22.9m = $16.7m = €13.5m. Cost price to PV at 10% margin = 13.5/1.10 = €12.18)
Contingent tax asset (not included in valuation) €50m – UK tax asset €17.95 = €32m x 20% tax rate = €6.4m
Valuation:
1. BV + Award – Shutdown cost = €54.805m = £48.8m/161.5 shares = 30p
2. BV + Award – Shutdown cost – Supply of 22.9m Wafers = €42.625m = £38m/161.5 shares = 23p
With possible further upside from asset gains.
Thanks
Joe
Hi Joe,
Small problem with your figures.
14670*45 isnt 7.4m.
It is 660k
Not that mine were better I didnt take into acccount shutdown cost nearly enough instead I took a wild guess.
I also didnt exit the position I halved it.
Not sure lease will need to be paid – could it be sold on instead ? Depends how conservative you want to be.
Also you might want to take into account Europe operations.
Will be interesting to see what happened – not my finest hour this one – live and learn.