As you can see from PV Crystalox Solar’s stock chart, the City has harboured doubts about the solar industry for some time. These reservations are due to a number of fears. Firstly, the City is concerned about excess silicon wafer capacity (in China for, example). There are also anxieties about the global property downturn (especially in Portugal and Spain) having an adverse effect on the number of installations taking place. Finally, the German government recently announced plans to cut subsidies. Yet despite all this, investors should not lose heart: the fundamentals are still intact.
For one thing, thousands of new solar-powered products are coming onto the market. These range from water heaters and battery chargers, to garden furniture and lighting systems, as well more efficient solar-panels for power generation. Better still, there are massive installation projects now appearing on the horizon. The Desertec Industrial Initiative, for example, is planning to build a network of solar plants stretching across the North African desert. Once complete, this network will carry electricity under the Mediterranean sea and supply up to 15% of Europe’s needs.
This is all good news for PV Crystalox Solar, which has a 5% share of the solar power industry. Long term, we should see sparkling global growth in solar power, given that it accounts for less than 0.01% of the planet’s electricity capacity. If this ratio was to increase to only 1% by 2020, it would double the industry’s size every year for the next decade. The next few years will be tough, but I’m sure the group will prosper: it enjoys strong relationships with its main customers in Germany and Japan; it’s profitable, cash generative and has e70.2m of cash in the bank. Conversely, many of its rivals are loss-making, burdened by debt and may go bankrupt.
The City is predicting 2010 sales and underlying earnings per share of £192m and 3.3p respectively. This puts the stock on a bottom-of-the-cycle earnings multiple of 15, falling to ten in 2011. The firm pays a 4.9% dividend yield. So overall, PV Crystalox Solar is a pretty bright play on the future adoption of solar power. The next trading update is due out on 27 May.
Recommendation: SPECULATIVE BUY at 48p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments