Shares in AIM-listed silicon wafer reclamation Pure Wafer (LSE: PUR) rose by as much as 25% when markets opened this morning, after the company said it would return between 140p and 145p in cash to shareholders.
The gain means that the firm’s share price has now risen by 263% so far in 2015. Ironically, the rise has been driven by the company’s decision not to rebuild its Swansea factory, which was damaged by fire in December. Instead, Pure will return the cash from the insurance settlement to shareholders instead.
Today, the firm said that it had reached an agreement to dispose of the 99-year lease on the Swansea site. As a result, the directors now expect to be able to return 140p-145p per share to shareholders. This is significantly more than previous guidance, which indicated the payout would be “unlikely to be more than 125p per share”.
Still a buy?
Pure Wafer’s board decided not to rebuild the Swansea factory because they believed that it might prove too difficult to attract a viable customer base and generate adequate returns.
The company’s last set of results before the fire suggest this decision was correct. Pure’s UK wafer business in Swansea reported an operating margin of 7.2%, less than half the 20% margin reported by its US operations.
Following the disposal of the Swansea site and the return of the insurance cash to shareholders, Pure will focus on its US business in Arizona, which the company says is trading in-line with management expectations.
I can’t find any broker forecasts for this business. However, today’s share price action suggests that the market is valuing Pure Wafer’s remaining business at around 15p per share, or £4.4m. How does this compare to the firm’s expected earnings? In the first half of the current financial year, Pure Wafer reported an underlying operating profit before exceptional costs of $1.2m, or around £775,000.
I can’t see any obvious reason to expect a seasonal bias to performance, so assuming that second-half performance is similar I’d expect underlying operating profit for the full year to be around £1.5m.
Based on these figures, I estimate that Pure Wafer’s underlying business could be trading on a P/E of 4, at today’s share price. That’s potentially cheap, as today’s update reports that the firm’s US operations are currently running “at record levels of productivity”.
Pure Wafer shares could be a buy, even at today’s price. However, as a general rule, I value small-cap firms like Pure Wafer with more caution than larger businesses. I’d certainly want to do some more research before buying shares in Pure after today’s gains.
I’d be particularly concerned about the competitive threats to Pure Wafer’s business, given that the firm was not confident it could regain a profitable customer base for its Swansea plant.
Investors need to ask whether Pure’s US business has any unique advantages with which it can protect its pricing power and scale.