Taking a Long Spread Bet on Renewables – PV Crystalox Solar PLC

I started spread betting PV Crystalox Solar PLC [PVCS: LON] six months ago as a value play and made a few quid. We need better more efficient, compact solar panels, the current ones are just huge and bulky and look terrible when bolted onto people’s house roofs. Renewable energy isn’t going away – far from it, it’s just getting going. Competition applies in all areas of commerce not just in this business – you adapt.
The bears argue that China can produce anything cheaper than its Western counterpart as PVCS is based in Germany. But does that mean we should close up our companies or just move to China? China has been producing cheaper stuff for decades now but can you name one quality brand which you want to buy from China? I have had many dealings with Chinese products over the years and admittedly they are cheaper but there is a noticeable difference in quality. On occasions, the term ‘blag’ has been used. Moreover, as opposed to the domestic How To Manage Your Money Worksheets side of the business PV Crystalox Solar deals in the much larger commercial market. With this in mind, PV Crystalox Solar trades on its reputation of supplying a high grade quality product. Sure, in the long run there is a risk that China might overtake production, but in that event PV Crystalox Solar PLC might just switch production to China even though I find it amusing that people seem to feel that there is no future for manufacturing in Germany! Germany is the second largest manufacturing exporter on the planet.
There are rumours that PVCS might have to cut the dividend. Fact is that in the 2009 interims, management stated ” directors will review the dividend for the full year based on the performance in the second half of 2009 and the prospects for the Group in 2010…” which is exactly what we want them to do. The dividend could be canceled, reduced, held, or increased…
Regarding future earnings, the forecast earnings per share is difficult to analyse because there are substantial effects from currency movements (which have been particularly volatile in the last 12-months or so) and the Bitterfeld costs. I like to look at adjusted EBIT which is effectively pre-tax operating profit, excluding currency movement and Bitterfeld costs and better reflects the underlying business performance.
For 2008 adjusted EBIT was 109M euro which is about 26 cents earnings per share (EPS). For 2009 the interim adjusted EBIT was 42M euro or 10 cents eps. The company has stated that H2 should be Financial Stress Management more or less as expected. Let’s assume that H2 will be the same as H1. That gives a FY 2009 eps of about 20 cents (on adjusted EBIT basis) versus 26 cents for last year. This is a 23% drop.
If we assume a 30% tax rate, and a GBP/euro exchange rate of about 0.9, that gives a sterling eps of about 20 * 0.7 * 0.9 = 13p. The share price is 62p which gives a forecast 2009 p/e of 4.8 (after tax but excluding currency movements and Bitterfeld). If we allow for the net cash of 77M euro (say 77 * 0.9 = GBP69M which is 17p per share), the enterprise value/earnings is only 3.5.
In my opinion this valuation is far too low which is why I have been progressively opening a long spread betting position on PVCS in tranches. In stable markets, for a growth industry, I would expect the ev/e to be about 12-15, giving a share price of 170-210p. The market is looking into 2010 and beyond and probably being overly pessimistic about the prospects in what should be a medium term growth industry. After all we have just had the most severe credit crunch for a century or so. It’s not surprising that capital-hungry projects are being deferred. But they will return and strong companies like PVCS will be around to partake.
Another possible reason the market is wrong is that it is placing too much emphasis on the headline eps. For 2009 the exceptional factors are going to significantly hurt headline earnings per share, just as in 2008 they helped substantially. If you strip these out, the dip in operating earnings this year and possibly next are not anywhere near as severe as indicated by the headline numbers.
I think anyone buying at these prices has a good chance of making money over the next 2-3 years, but of course there are no guarantees. Granted I am a bull, sure there is money to be made spread betting this share but as a long term investment there are better bets.

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