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Thank you. I appreciate your explanation. I particularly liked...

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SA1588

432 Posts.

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11/04/16

15:41

Post #: 17474000
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Originally posted by bookend ↑

Sure SA1588. I did appreciate your thorough discussion of risks that started the thread.

I think your consideration of accrual accounting is fine. For me, I simply like to look at cash generation by stocks as the primary consideration as it is the key to dividends and financial risk. It might have arisen from my experience of the dot.com boom.

I'm a little cautious as to the accruals process too. Does a tree really have any value if it is <5 years old? My understanding is that heartwood and oil formation only meaningfully occurs in the last few years before harvesting, so on a '$$ realisable' basis maybe plantations should have a negative value rather than positive for the first 10 years to represent costs sunk? Anyone have a better understanding than me?

If you look at TFC's accounts over the past years it has been notable that the company has needed to access equity or debt markets every year, which is understandable in the context of the capital intensity of it's business model and director's strategic goal of increasing plantation ownership. The capital intensity of its business model has seen the cost of servicing debt reach the stage where for every $ of cash generated by their operations (using EBITDA as a proxy) the company needs to pay away almost 50% to its debt holders.

Assuming investment hectares sold remains steady and the harvests proceed as planned then cashflows should start to see this debt load begin to ease in FY22. This is over half a decade away, which is quite a while. Can you identify any other stocks that have interest coverage of <3x with an expected removal of financial risk in +5 years? How do they trade?

Who knows what might happen in the meantime...A global recession..will TFC's potential investors in new plantations and purchasers of oil still pay current rates....what happens if there is any negative risks to brokers forecasts? Note the US bond holders hold security over all of TFC's assets, so would it not be a good outcome for them if shareholders equity fell to zero and they effectively acquire TFC for $US175m?

So my use of 'cash' profit as a basis for valuation can be broadly considered as a proxy for risk. I'm not comfortable investing in businesses that don't have a clear path to profitability. If you read broker research they all have ~$3 DCF valuations which is fine, but they are all dependent on cashflows a long way out.

I would also argue 'the market' agrees with my perspective....just about every bit of positive news has been forthcoming since the 1H16 result and the share price has slowly been trending down. If 'the market' wanted to value the company on 'reported' profits it would be at $3 already.

Again, keep in mind I reckon this is still a standout....if you can be patient for half a decade. Hope I haven't wandered to much with my thoughts!

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Thank you. I appreciate your explanation.
I particularly liked this comment “just about every bit of positive news has been forthcoming since the 1H16 result and the share price has slowly been trending down. If 'the market' wanted to value the company on 'reported' profits it would be at $3 already.”

TFC Price at posting: $1.58 Sentiment: Buy Disclosure: Held
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