Solar Dilemma: How Much Could Hoku Fetch In Sale? (HOKU)

Hoku Scientific, Inc. (NASDAQ:HOKU – News) has been looking for additional finding for its wholly-owned unit Hoku Materials, Inc.  This was established to manufacture and sell polysilicon for the solar market.  The company said late Friday that it is in discussions with several strategic and financial investors regarding debt and equity financing, but it expects it will need a few months to work through its options. More importantly, the company has hired Deutsche Bank Securities as its financial advisor to seek a possible sale of the company.

Hoku Materials will preserve cash by issuing orders for a temporary slowdown of construction at the polysilicon production facility under development in Pocatello, Idaho.  The company had already announced a strategic delay in constructing the TCS portion of the plant.  The delay will now extend the slowdown to temporarily include the other areas as well.

The company has tried to stay optimistic.  Its press release noted, “…we remain absolutely confident that this plant will be completed and that we can meet our customer commitments. To that end, we have no plans to lay off any of our staff, including the first group of plant operators that we hired in Pocatello in June.”

Hoku has not been immune to the credit crunch, the economy, polysilicon and PV price pressure, and a global decline in investment capital.  The company also claims no senior bank debt on the project, offering the flexibility in structuring plant financing.

Lastly, the company noted that its Hawaii-based subsidiary focused on turnkey integration of photovoltaic power systems is not impacted by the Hoku Materials news. Both are wholly owned subsidiaries of Hoku Scientific, but each operates completely independently of the other and Hoku wants to continue expanding Hoku Solar’s PV installation business and continue to actively install systems in Hawaii.

While  slowing expansion at a plant sounds bad, this will actually allow the company to slow down its cash burn rates as well.  Because of old financings and new amendments, we are not comfortable making formal quarter-end cash balances.  But that figure was listed as $17.383 million at the end of the March quarter.  It has committed contracts for future production, but the end of quarter long-term debt was just over $173.5 million.  The forecast ramp for revenues was not until 2011 and the company has a going concern issue after its last earnings report.

After a 15% drop to $1.93 in the stock today, its total market cap is listed as just under $41 million.  At one point we thought that the production facilities for making PV and polysilicon might be attractive takeover targets.  But since prices and demand have plummeted, that notion is one that seems to be academic debate rather than inevitable.

If solar demand picks back up and if contracts outside of what Hoku’s cadre includes start to firm up, then there is a chance that the facility’s value would be worth closer to what is listed on the balance sheet.  But that $204.5 million value for property, plant, and equipment doesn’t sound as though it would fetch that much on the open market if you consider the economic environment today.  Anything is possible.  But the endgame here on what Hoku could fetch on the open market is highly subjective.  We can see a scenario where there is value that is multiples over the value today, and we can see a scenario that would cause the ultimate values to be far lower.

Jon C. Ogg
July 13, 2009