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 firms share price has now risen by 263% so far in 2015. Ironically, the rise has been driven by the companys 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 Wafers 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 companys last set of results before the fire suggest this decision was correct. Pures 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 cant find any broker forecasts for this business. However, todays share price action suggests that the market is valuing Pure Wafers remaining business at around 15p per share, or 4.4m.How does this compare to the firms 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 cant see any obvious reason to expect a seasonal bias to performance, so assuming that second-half performance is similar Id expect underlying operating profit for the full year to be around 1.5m.
Based on these figures, I estimate that Pure Wafers underlying business could be trading on a P/E of 4, at todays share price.Thats potentially cheap, as todays update reports that the firms US operations are currently running at record levels of productivity.
Pure Wafer shares could be a buy, even at todays price.However, as a general rule, I value small-cap firms like Pure Wafer with more caution than larger businesses. Id certainly want to do some more research before buying shares in Pure after todays gains.
Id be particularly concerned about the competitive threats to Pure Wafers business, given that the firm was not confident it could regain a profitable customer base for its Swansea plant.
Investors need to ask whether Pures US business has any unique advantages with which it can protect its pricing power and scale.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.