Tuesday 26 January 2016

Second Purchase - TFS Corporation Beaten Down to a Buy

I have decided to initiate a position in TFC. I purchased 1700 at 130c. Once again I will split my position over two parcels (this time I will have more than 1 day between purchases!). The timing here involves an element of risk due to the recent substantial fall.

I have outlined the business in a recent post, but here are the facts behind my investment.

Monday’s price drop has potentially marked “capitulation” as the price was beaten down to close at 129.5c. The RSI shows it’s oversold, and there was good support coming in around the 130 level. Today’s pre-market shows very good support around these levels. There also is not a lot on offer on the sell side.

As mentioned in the previous post on TFC, it is very much a long-term play, with the significant future cash flow potential from large harvests still a few years away.

I believe the company is fundamentally undervalued at these levels. They trade on a trailing PE of 3.7 currently (SP of $1.30). Note this includes revaluation of plantation assets as they mature towards harvest. Some believe this is overstated. The revaluation assumes an end oil price that is much lower than what they have achieved with their agreements. I believe they have proved their business model and the revaluation is fair (it is also audited). Trailing Price/Cash EBITDA ratio (excluding non-cash revaluation etc) is 7.3. Cash EBITDA is forecast to grow by 5-10%. I believe reported NPAT will grow by more (last year this was 37% vs cash EBITDA growth of 12%) as it has in the past due to revaluation of assets.

Given my relatively short one-year timeframe (the market may continue to ignore TFC), I need a bit more than that to invest. Catalysts that I believe will have a positive impact on the share price this year are:

·         Announcement of agreements with new end markets

·         Financial results

·         Results of harvesting and subsequent sale of wood/oil

·         High establishment fees for managed plantation investors than prior years

·         Positive results from the pharmaceutical trials and Benzac sales. The reverse applies obviously

·         All the above will continue to prove the business model which will allow build investor confidence.

I will consider closing my position if there is a significant rerate. Normally I wouldn’t do this. I see significant long-term upside for the company, but given the one-year timeframe of this portfolio it will be important to lock in profits for what is otherwise a relatively long-term investment thesis.

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