TFS Corporation Enters My Thinking

TFS Corporation (ASX:TFC) has been a company I have watched (and owned) for a while. I won't go into detail, I will quickly outline the company and the reason it has come onto the radar.

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/

The First Purchase

The first purchase in the $20K challenge portfolio is......

Mobile Embrace Limited (ASX:MBE)

On Friday 22 January 2016 I purchased 7,275 shares at 31.5c. I intend to spend the remaining $2,500 allocated to the company over the next few days.

Investment Thesis

I won't go into huge detail here, but I will outline the primary reasons for investing in the company.

I have followed this company for a couple of years while they have experienced some good growth.

The business has two main arms: mobile advertising and mobile payments. The worldwide shift towards smartphones is obviously a massive tailwind for the industry and why I am excited about the company. The company is based in Australia where it has built a successful business. It has recently become fully operational in the UK along with some South East Asian countries. Revenue from overseas is expanding at a rapid rate.

Due to increasing business costs profitability has been patchy and hard to predict, however, a lot of the expenses that have caused this are becoming more predictable.

Key financial information

Revenue Growth:

FY13 - $12.2m

FY14 - $19.3m

FY15 - $33m

HY16 forecast - >$27m

The above shows some impressive revenue growth over the past few years, and a good forecast going forward. However, revenue growth means nothing if it doesn't eventually reach the bottom line. The company is close to leveraging good returns from its cost base.

HY16 profit forecast is for >$3.5m EBITDA, and >$7.5m underlying EBITDA. The $4m difference comes from a one-off cost associated with customer acquisition that will be earnings accretive over the next few years.

I expect H2 of FY16 to be considerably better than H1, however for the purpose of conservatism I will assume they will be the same.

Reported EBITDA, assuming further one-offs for FY16~ $7.5m. This will roughly translate to $4.9m NPAT or 1.2cps

Reported EBITDA, assuming no further one-offs (further one-offs are entirely possible) for FY16~ $11m. This will roughly translate to $7.1m NPAT or 1.8cps.

Underlying EBITDA for FY16~ $15m, or approximately $9.7m NPAT or 2.4cps.

Given the rapid growth I will conservatively use a forward PE of 20. This means an SP of between 24c and 48c is justified. However, I am more inclined to lean towards the underlying number as this is more representative of earnings going forward. Given management historically beat their own guidance, and a PE of 20 is potentially conservative, I see significant upside from here to an SP of 50c in the next year (~50% above my purchase price).

Technical Analysis

On Thursday 21 January 2016 a number of important technical indicators occurred. The price bounced off previous resistance of 29c, a gap was closed between 29 and 29.5c, the SP bounced off the 200 day EMA and the RSI hit oversold levels. The next few trading days will be interesting and if it holds above these levels we should see a turnaround in SP direction.

SP Performance

The recent high of 44c a month or so ago has marked the short term peak. Since then the price has been beaten down to current levels. There has been no change to the business fundamentals. The worldwide markets have been very nervous and been selling down higher risk companies. This stock has always been extremely volatile and large SP swings are common. I see the recent SP action as an extremely good buying opportunity. And as always if it drops further I will buy more. 

Conclusion

Mobile Embrace is a company that has proven itself over the past few years. The industry it is in has significant tailwinds, and they are at the beginning of an international growth spurt. The relatively fixed cost base is likely to see margins expand and new revenue will find its way to the bottom line a lot faster. Recent SP action has resulted in a very good buying opportunity.