Further to my post of 03/11/15 (which discussed competitive position, business model, market, growth, multiple revenue sources and target markets), here is the next instalment of my analysis of why TFC is my top pick for 2016 and beyond (please also note my comments there about short-term uncertainties):
Proven performance:
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NPAT up > 4x in 3 years
1
NTA up > 2.5x in 3 years
2
Significant improvements in survival rates and yields
3
History of meeting or exceeding guidance
Stong pricing power:
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Over decades as natural forest supplies decline, prices have increased 15%pa
1
Monopoly supply, undersupplied markets and high barrier to entry will underpin future price increases
2
Future drug applications will support large increases in current price of around $7000/kg
Strong intellectual property:
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World's only large, proven sustainable sandalwood farming operation
1
heartwood yields expected to improve by 4x for the FY16 harvest, driven by:
2
86% increase in survivability expected in FY16
3
116% increase in tree yields in FY16
4
Heartwood and oil extraction yields met management's expectations
5
Tree survivability has increased
6
Harvesting now for 2 years; proven successful operation and oil extraction quality
7
High survival rate of 91% for first year of FY14 plantings
8
Ongoing losses of under 1% from year 2
Very high margins and profitability:
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TFC is getting around $7750/kg for oil at a production cost of around $500
1
Production cost should decrease as heartwood yields increase 4x this FY
2
Steady growth of 1500ha pa will keep these costs steady, and reducing as % of sales
Undervalued and naturally growing assets:
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TFC’s owned 3,491ha (FY14: 3,168ha) generates a liquidation value of $1,020m ($2.57ps)
1
$137M positive asset revaluation in FY15, due to growth, oil price increases, currency changes
2
Little if any value attributed to forest management business, pharmceutical prospects
3
Assets presently undervalued on balance sheet; assumes oil price of US$2800 vs actual of US$4385
Low growing risk:
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Regular wet season in northern Australia, and access to water for dry season
1
Located inland reduces cyclone impacts
2
Proven over > 15years to resistant to cyclones, drought and disease
Strong pipeline of pharma products:
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Monopoly supply for Benzac acne products (4 of) already on market in USA, and reviewed as #1 acne treatment
1
OTC Eczema and HPV products have been developed and should be marketed within one year
2
Developing four products for FDA approval (one in Stage III, three in Stage II)
3
Owns the USA Pharma development companies, Santalis & Viroxis
4
No value yet attributed to pharma developments; effectively a free option on multiple products
5
Has potential to exceed value of forest management business
Financing Opportunity:
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US$150M Bond at 11%pa interest matures on 15 July 2018; annual interest of around AU$23M
1
TFC achieved new bond raisings recently at 8.2 and 8.5% as its business de-risks
2
From 15 July 2016, the premium payable to bondholders reduces from 8% to 4%
3
Refinancing likely in 6 - 18 months to reduce annual interest from 11% to around 8%
4
New financing rate could be even lower as risk further decreases on 10x harvest increase in May/June
5
As recurring revenues and assets grow strongly, TFC can then reduce borrowings while reinvesting for growth
Still has turnaround upside:
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TFC is still small enough at around $600M market cap to be below the radar of most investors
1
TFC is still tarnished by the bad history of most MIS operators (e.g. Timbercorp)
2
TFC is rapidly evolving from establishing and managing forests for investors to a vertically integrated, diversified, highly profitable product supplier with recurring revenues
Good luck to all long-term holders. The above is my opinion only, and if share investing were this simple, we would all be multi-millionaires. Clearly things can also go wrong, so do your own research.
TFC Price at posting:
$1.61 Sentiment: Buy Disclosure: Held
