Newsletter 62 – Pv Crystalox - Managerial quality; possibilities for fortune rebound

PV Crystalox (LSE:PVCS) has a strong balance sheet relative to its market capitalisation, but it keeps losing money.  A key consideration is whether the managerial team is equipped, intellectually and in terms of integrity regarding shareholders, to turn things around for the owners.
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The evidence on managerial quality feeds into a consideration of a range of factors that might cause the share price to rise.
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Managerial quality

Iain Dorrity, CEO, has a PhD in physical chemistry and joined the company as early as 1986.  He owns 17.8m shares (10.58%).  He was a member of the MBO team that acquired the Crystalox business in 1994.

I think we can guess that he is likely to have quite a large emotional investment in the business. Ex-colleagues and other old friends who helped with the MBO are still significant shareholders and so there is some pressure on Dr Dorrity to do well by shareholders from families who might have a high proportion of their net wealth in PVC shares.

Having said that, the Board have not yet adjusted to the reality that they are a tiddler company. They pay themselves €1m per year, with Dorrity walking away with €386,510 (at least it is less than the €554,934 in 2010).

The other executive director, Mathew Wethey, FD, has only recently joined the Board so there is not much on him apart from joining the company in 2009.

To their credit they have not gone chasing after empty revenues: reduced output, and fewer employees, from over 299 to only 88 people.

They have generated cash by ensuring that customers compensated PVC if they reneged on their fixed-price contracts….…and then handed large amounts of money (more than the current MCap) back to shareholders. Thus there is some evidence to suggest they are not empire-builders and really do care for shareholders.

On the other hand they remain optimistic that the market will recover and they can again grow the company.  Perhaps they are right. But perhaps they forecast what they wish for; and in positioning the company for the expected upturn they destroy shareholder value if they prove too optimistic.

Finally, shareholders from years ago followed the company closely and wrote bulletin board posts on ADVFN.  The consensus seems to be that they a good managers.

What might lead to a revival in the share price?

Ben Graham had a checklist for possible improvement routes:

• Industry economics change for the better.  It is possible that the current imbalance in supply and demand is corrected by rivals exiting the industry leaving the remaining players to raise price above cost.  I get the impression that there is oversupply at three levels (1) polysilicon (2) wafers, and (3) solar PV cells.  One day, more rational markets might develop, so there is some hope.  This is made more likely by the very rapid growth of PVs installed around the world. But at the moment the market is awfully distorted, with irrational production despite losses (e.g. in China) and international tit-for-tat trade barriers creating more confusion.
• Managers become brilliant at running the business.  Even though facing industry headwinds, the team at PVC, with their decades of experience, may be able produce amazing productivity, and thereby squeeze out a decent profit in a commoditised sector.  I cannot judge the size of the room for improvement, nor the talent available relative to rivals, but in the 2013 report they are already reporting ‘considerable progress achieved in lowering our wafer production costs…our cash cost of wafer production is now closer to market prices’.
• They are acquired. PVC is one of the smaller players.  It has a healthy-looking balance sheet. It has a long history of technological prowess.  Perhaps a bigger company will be interested. They should certainly pay more than NCAV.  Note that the tax losses might be useful for an acquirer.
• Liquidation. You have to ask if there is a stealth liquidation underway already. It has shrunk dramatically over the last four years, and tens of millions have been paid out to shareholders.  Perhaps the managers will conclude that continued wafer production is futile and hand a sum close to the NCAV to shareholders over the next few years. In 2012 the Board said: ‘Given our strong net cash position and the challenging market expectations going forward, the Board has decided to return cash to shareholders’ (2012 Report) – if the same tough markets continue, won’t the logic be the same? To counter that they also said that ‘The Board remains committed to the solar industry’.

Tomorrow I express my continuing worries about the company and state my conclusions.