Gamble of the week: bright play on solar power
By
Paul Hill Oct 30, 2009
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In December, Copenhagen is staging the next UN conference on climate change, with the objective of agreeing a new set of stringent limits on carbon emissions.
Ahead of the event, scientists have warned that greenhouse gases must fall by between 25% and 40% in order to avoid an environmental disaster. Meanwhile, the International Energy Agency estimates that nearly 50% of global electricity will have to come from renewable energy sources by 2050. So what does all this mean for PV Crystalox Solar, a producer of silicon wafers, with a 5% share of the solar-power industry?
Long term, these changes should mean sparkling growth, since solar energy currently accounts for less than one thousandth of 1% of the planet's electricity capacity. Indeed, based simply on crunching the numbers, for this ratio to increase to only 1% by 2020 would mean doubling the industry's size every year for the next decade.
Short term the picture isn't quite as rosy, though, as the downturn has lead to a savage 20%-30% decrease in demand. Spain was especially hard hit after the collapse of its property market. Worse, this contraction has come at a time when more productive capacity has been brought on stream, and silicon wafer prices have fallen due to cut-throat discounting from Chinese manufacturers.
PV Crystalox Solar (LSE: PVCS)
So the big question for investors is whether PV Crystalox will be able to survive the immediate storm and blossom when better times return. For me, the answer is a resounding yes.
Admittedly, it will be tough over the next 18 months, but PV Crystalox is a low-cost producer, has a respected brand and enjoys strong relationships with its main customers. These are tier-1 solar cell manufacturers such as Sharp, Schott Solar, Mitsubishi and Suntech Power. What's more, the group is profitable, cash generative and has €77.5m of net cash. This is all in stark contrast to many of its rivals who are loss making, heavily in debt and may shortly go bankrupt.
The City is forecasting 2009 revenues and underlying EPS of £198m and 8.0p respectively. This puts the stock on a 'bottom-of-the-cycle' earnings multiple of 8.3. That said, there are other possible problems to watch out for, such as a squeezing of government subsidies, foreign-exchange fluctuations and future technology shifts. All the same, with the shares already pricing in the worst, PV Crystalox still looks like a bright enough play on the expansion of solar energy.
Recommendation: speculative BUY at 67p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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