TFC Article, page-2

Quoted from the Australian

Sandalwood grower Qintis has ‘Ponzi-like structure’, says Glaucus


Sandalwood seedlings tended in a nursery at Kununurra in Western Australia. Pic: Stuart McEvoy

• Daniel Shane
• Dow Jones
• 2:34PM March 22, 2017
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Short-seller Glaucus Research has taken aim at Australian sandalwood grower Quintis, alleging that the company faces bankruptcy and the stock is worthless.
In a report issued today, the US research firm criticised Quintis — which this week changed its name from TFS — for having a “Ponzi-like structure.”
Quintis later rejected the Glaucus research as a “self-serving report by a shorter of the stock in an attempt to drive TFS’s share price down for their own financial gain”.
“Substantial and egregious inaccuracies” in the report could have been avoided had the report’s author contacted the company, it said, as it reaffirmed its guidance for full year 2017 cash EBITDA to rise at least 25pc.
Shares in Quintis (TFC) were down 6.7 per cent in early trade on the ASX following the publication of Glaucus’s note.
The Perth-based company says it’s the world’s biggest manager of commercial sandalwood plantations. Indian sandalwood is used in incense, perfumes and traditional Chinese medicine.

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Central to the report is Quintis’s structure as a managed investment scheme, or a publicly-listed pooled investment trust. These types of schemes have seen several bankruptcies in recent years, resulting in about $2 billion in losses to Australian investors.
Glaucus says Quintis, which has a market cap of $500 million, doesn’t generate any cash flow and is reliant on raising capital for new plantings, making payments on debt, and paying off earlier investors. Interest payments reached 50 per cent of cash EBITDA last year, while total borrowing has increased by $65 million in 2017 so far. The company’s raised about $1.4 billion in gross financing to date. Glaucus thinks Quintis will struggle to service its debts, let alone pay them off.
One big problem with Quintis, Glaucus says, is that since sandalwood trees take between 15 and 20 years to grow, generating any cash flow takes a long time. The company’s profitability is instead driven by marking up the value of its plantations, which makes up 85 per cent of profit, the short-seller claims.

Sandalwood plantations near Kununurra
Glaucus says that the company’s marketing materials resemble a Ponzi scheme.
Quintis is said to promise investors cash dividends within two years of investing, as well as full repayment of the principal within seven years. Given the harvesting period of sandalwood, the numbers don’t add up, the research firm believes.
The company’s forecasts for cash flows from future harvest are also based on unrealistic assumptions and are far too high, Glaucus reckons.
“Once investors scrutinise TFS’s misleading forecasts, dubious marketing materials and questionable customers, TFS will lose the confidence of the capital markets it requires to survive,” the Glaucus note reads.
Other criticisms include the veracity of an exclusive Chinese distributor that Quintis recently brought on board. “Far from being a big operation capable of purchasing such vast quantities of sandalwood each year, (it) is actually a borderline-distressed commodities importer with minimal operations and a small balance sheet,” the report reads. Glaucus says Quintis “materially mislead investors” over this deal. Glaucus also points to high turnover in management as another red flag.
At the time of writing the company hadn’t responded to the criticisms put forward by Glaucus.