TFC grows Indian sandalwood plantations and sells oil and wood to high value end markets (they have a deal with Galderma for $4500/kg of oil).
It has recently dropped from $1.90 to $1.30 on no news. The company has reaffirmed guidance a number of times during this drop. Four directors purchased shares in October 2015.
In my opinion 2016 is a big year for the company.
This year marks the first meaningful harvest of which they will have a significant volume of oil to sell. They have previously proven their ability to successfully harvest and sell oil, but I am of the belief the market wants to see proof on a larger scale. There is currently no reason to believe they won't be able to achieve this.
Currently they have agreements with 2 companies (one being Galderma) to sell oil for $4,500/kg. There are a number of other end markets currently in the pipeline. I believe the market wants to see more end uses for the oil/wood before investing. There is a potential perceived risk that they won't be able to sell all their harvested wood. The company is confident these agreements will be reached and they are likely to occur in 2016.
The problem with investing in this company in the 2016 challenge portfolio is the long term nature of their cashflow. It is not until 2020 that the harvest size becomes large and has the potential for significant cashflow. Therefore, the market may not catch on for a few years yet.
There are also people who aren't happy with the revaluation of the trees which significantly adds to the companies reported profit. This won't matter once the trees are converted to oil, but it is something to note regarding investor sentiment. The PE based on reported profit is currently very attractive at 3.4.
I really like this company. There are a number of reasons why market sentiment might not work in favour of the company in 2016, but if it keeps dropping I will certainly consider adding it to the portfolio. 2016 has the potential to cause a significant rerate.
For more detailed analysis see this link for a number of reports:
http://www.tfsltd.com.au/investors/shareholders/broker-research/
Nice blog, one thing, is there any real advantage in buying in two seperate lots? It will add to brokerage costs while buying the second lot only one wee after the first would not really add any timing protection
ReplyDeleteHey thanks for reading/commenting. You're right - it doesn't add much protection, but it does add some. I like the fact I can initiate a position and if market sentiment changes I still have the opportunity to take advantage. I'm paying $30 brokerage so I am happy with the trade-off
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