Small Cap Value Report (Fri 17 August 2018) - QUIZ, AIEA, THAL

The long running PV Crystalox Solar (LON:PVCS) saga appears close to its end game as the company this morning announced an agreement with an ex-customer to settle a long running supply contract litigation over a historic “take or pay” arrangement. This was a special situation first flagged up by Paul Scott in summer 2016. Full text below, but in essence the company has agreed a lower settlement amount than awarded by the courts in exchange for not being required to manufacture and deliver product that the customer no longer wants. Company is now a virtual cash shell so may be heading to a distribution/liquidation. Smaller bird in the hand now but less uncertainty as to what was possibly hiding in the bush.

Gus.

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PV Crystalox Solar PLC

Settlement Agreement relating to Arbitration Award

Further to the announcement of 8 November 2017, PV Crystalox Solar plc (the "Group") announces that is has concluded an agreement with its customer in settlement of all claims and obligations (the "Agreement") under the wafer supply contract and arbitration award. Under the Agreement the customer will make total payments of €28.8m, including the initial payment of €14.5m received in May 2018, and waive its right to demand delivery of the outstanding wafers. Under the Agreement a further final payment of €14.3m will be made on 30 November 2018.

On 8 November 2017 the Group announced that it had received notification of the final award rendered by the International Court of Arbitration of the International Chamber of Commerce in the matter filed by the Group in March 2015 and arising from an outstanding long-term wafer supply contract with one of the world's leading PV companies. The award required the customer, who had failed to purchase wafers in line with its contractual obligations, to pay the amount of around €36.5 million including interest to the Group as at 1 May 2018. The obligation to pay was not conditional upon the Group's delivery of 22.9 million wafers, outstanding under the contract, although the customer's right to seek such delivery was not precluded by the award. As part of the Agreement, the customer has waived the right to demand delivery of the wafers.

My morning smallcap tweet:

PV Crystalox Solar (LON:PVCS), LXB Retail Properties (LON:LXB)

PV Crystalox Solar (PVCS) agrees haircut to €36.5m arbitration award. Will get €28.8m and the customer will waive its right to demand delivery of the outstanding wafers. I hold.
LXB Retail Properties (LXB) confirms another 4p return of cash from sale of assets. I hold.

Morning Graham
I would be interested in your views on Airea (LON:AIEA). Paul covered this floor covering manufacturing in some detail at the prelims so he may possibly have some comments.

Jonno

Hi Graham
I'd second Jonno's request for Airea Airea (LON:AIEA). Closure of the residential carpet manufacturing has removed a loss making division, but the pension scheme remains an issue.
I hold in size
Andy

Morning Graham. Yep a third for AIEA if can have time kind Sir!

And a fourth for Airea (LON:AIEA) !

Should I do Airea (LON:AIEA) guys?

In reply to post #391524

I'll be floored if you don't.

Paul has offered to do it, since he's already studied it plenty of times and owns shares in it.

Airea (LON:AIEA) is a company of interest to me (I've held the shares for a while, and written about it here quite a lot previously), so I've agreed with Graham that I'll chip in a review of its interim results today here, for copying into the main report.

Am working on it now.

Regards, Paul.

In reply to post #391574

Deleted

Additional section to add to the main report, from Paul Scott

Airea (LON:AIEA)

Share price: 62p (up 13.8% today, at 10:41)
No. shares: 41.4m
Market cap: £25.7m

(at the time of writing, I hold a long position in this share)

Interim results - for the 6 months to 30 June 2018.

The principal activity of the group is the manufacturing, marketing and distribution of commercial floor coverings.

I've written positive pieces here about this company before. In a nutshell, it's a turnaround situation - its heavily loss-making residential carpet manufacturing business had to be closed down. This has transformed the profitability of the group, which is now focused on a decently profitable & growing niche in commercial flooring. To get a feel for its products, here is the group website.

An unsolicited takeover bid approach was made by larger flooring distributor James Halstead (LON:JHD) but that fell through in May 2018. The company may not currently be in play, but in these type of situations a takeover bid is often the long-term outcome. Which is great, if the acquirer coughs up a generous premium price.

Revenues - up 13% at £9.1m (this is continuing operations only - i.e. excluding the closed carpet division). Good, but not stellar growth.

Operating profit - up only 1.6%, which strikes me as a little disappointing.

Profit before tax - benefits from a lower finance charge, so is up 15.2% to £1,323k - still not a bad result, for just 6 months.

Tax charge - note this is very low, both in H1 this year, and in the prior period comparatives. This flatters EPS somewhat. I haven't looked into why the tax charge is low - probably due to b/fwd tax losses.

Basic EPS in H1 is 3.18p. There aren't any broker forecasts, so the only thing I can do is to simply double that, to get to a rough idea of full year EPS of c.6.4p. That puts the shares on a PER of about 10 - seems good value for a company producing reasonable organic growth.

Dividends - the release of working capital from closure of carpets division gave rise to a special dividend of 5p, paid on 23 May 2018. The interim divi this time is maintained at 1.75p. I don't know what the final dividend will be, but looking at the history, the trend is upwards. So we might get maybe 2p-ish as a final divi? That's just my guess. Put that together with the interim divi, and we're probably looking at something like 3.5p to 4.0p full year divis. That gives a bumper yield of c.5.6% and 6.5% - very pleasing.

Balance sheet - generally very good, with an excellent current ratio of 2.46.

Note there is an investment property of £3.15k, very nice to have.

Pension deficit - this is undoubtedly a fly in the ointment. It's only shown at £2.1m on the balance sheet, but the recovery payments are quite significant at £200k in H1, so £400k p.a. It's not a deal-breaker, more of a nuisance.

Outlook comments - pleased with progress, but uncertainties remain (e.g. Brexit).

There's some more positive-sounding commentary in the main body of the narrative, e.g.

Strong growth in the order book and increased sales both in the UK and internationally was largely driven by the success of new product introductions.  The launch of further new products is transforming our offer in the medium and premium price sectors and our sales force has a growing portfolio of attractive complementary products to grow our share within this market sector.

Our international sales grew by 30% in the period, driven by the new products, increased penetration of existing markets and the ongoing development of the distribution network.

Sounds encouraging!

My opinion - I like it. These results don't bowl me over, but they're good, and the valuation looks modest. The commentary sounds upbeat too.

I imagine we'll get a takeover bid as the exit - I'd be disappointed with anything below 100p.

In the meantime we have a lovely & growing dividend yield.

Therefore, risk:reward seems good, and I'm happy to continue holding for another 6 months.

Re Airea (LON:AIEA) ..the key to understanding what the future *might* look like is to look at the timing of new product launches..they’ve been continuing throughout the accounting period..and importantly after period end 2 more product lines were launched. All of these were only possible because they’ve spent 1.5m USD on one of these;

http://www.cardmonroe.com/125/card-monroe-colorpoint-machine

..it means they can produce at higher speed/lower cost but more importantly a give whole new range of design possibilities ...hence the new product launches.

Looking at today’s RNS they say ;

‘Strong growth in the order book and increased sales both in the UK and internationally was largely driven by the success of new product introductions. The launch of further new products is transforming our offer in the medium and premium price sectors and our sales force has a growing portfolio of attractive complementary products to grow our share within this market sector.

Our international sales grew by 30% in the period, driven by the new products, increased penetration of existing markets and the ongoing development of the distribution network.’

..I’m expecting the full impact of these product changes to be felt In upcoming periods but many of the costs fell into the reported results today.

This is my 3rd largest holding ..having been buying from 10p a share right the way through to today so I’m a v happy holder...especially as today’s interim dividend mirrored last year’s final dividend (which was only described as an interim because of the 18mth accounting period around the change of year end)

This reminds me of a v early stage James Halstead (LON:JHD) type multi-year compounder

Note there is an investment property of £3.15k, very nice to have.

Is this right? I think my shed cost more than that :-)

All the best, Si

In reply to post #391629

Hi Simoan,

Yes sorry about the typo. I spotted it shortly after publishing, and asked Graham to correct it in the main article, which he's done.

Regards, Paul.