Sandalwood & Nestles
We published our Sandalwood Investing report January 2014 when shares in the Sandalwood plantation company, TFS Corp. (share symbol TFC) were selling at A$1.19. The shares passed A$2.15.
(click on image to enlarge.)
Then TFS announced that a Nestle owned company will buy $500 million worth of sandalwood oil from them.
The share price then plummeted. These are thinly traded shares and I suspect that some major shareholders took profits.
Value still looks excellent t me and I continue to hold my position in TFS Corp.
An ABC.net article entitled “International dermatology company Galderma confirmed as multi million dollar buyer of sandalwood oil” (1) by Tyne McConnon says: The world’s largest producer of Indian sandalwood says Nestle-owned company Galderma is the multi-million-dollar buyer of its oil.
Tropical Forestry Services (TFS) announced in March it had signed a deal expected to be worth half a billion dollars with a pharmaceutical company.
TFS has plantations in Western Australia, the Northern Territory and Queensland.
The company’s head of global products Mario Di Lallo says Galderma will use the oil in various products.
“Things like eczema creams, warts, acne, actinic keratosis, which are the pre-cancerous skin lesions that people go and get cut off and burnt off.
“Most things that afflict the skin.”
Mr Di Lallo confirms the deal to sell the sandalwood oil for US$4,500 per kilogram for up to 20 years.
The TFC price may still be quite low.
The analyst we used who has visited the plantation and issued a report on the shares of TFS Corp. gave a Buy recommendation with a target price of .A$.90 cents. The price was A$.77 cents at the writing of the report.
The report said: We visited TFC’s operations around Kununurra and seeing for ourselves the proceeds from the first 8ha harvest, what is clear is that the knowledge gained from the earliest plantations has been deployed and has resulted in material improvements in Indian Sandalwood growth; as such whilst yields over a number of years are likely to fall short of PDS targets we see harvests for more recent plantings as likely to considerably exceed heartwood developed per tree.
With confidence provided regards heartwood and oil production, the next key uncertainty is sustainable pricing as larger volumes of wood and oil become available; we are of the view that emergence of a sustainable, legal supply (most Indian Sandalwood is poached) will see an increase in demand from pharmaceutical and fine fragrance sectors, with the growing wealth of India and China driving decorative carving, fragrance and religious ceremony needs.
The dwindling supply of natural Indian Sandalwood has seen a considerable amount of trade on the black market rather than via official traceable channels and product substitution (both different sandalwood species and synthetics) occur, which does present uncertainty as to how inelastic pricing is as sustainable plantation volumes increase.
TFC is the only traceable supplier for pharmaceutical industry
Demand estimates shows there appears little prospect of oversupply.
Indeed, by the time the FY13 plantings are harvested and sold in 2028 the likely demand from an increasingly wealthy India and China will continue to favour demand.
Scope for +$3bn of operating profit over next 15 years vs current market cap of $220m.
Market will pay attention to TFC at some point in time.
As such, when combined with harvesting and processing fees for MIS and Wholesale plantations it is not unreasonable to anticipate +$2.5bn EBITDA being generated over the coming fifteen years from all harvesting and sales activities, on top of another ~$750m EBITDA from establishment services if the company can consistently generate +1,000ha of annual new plantation sales.
Stock market will inevitably appreciate ‘embedded value’ given sheer scale of potential profits.
However if we look forward a number of years, say a decade at which point TFC could be generating sustainable EBITDA of ~$400m from harvesting its owned plantations, harvesting and value-adding MIS investors’ harvested wood and also from new establishment fees; in turn this could generate EPS of +80c which if applied to a PER of ~13x (a +25% discount to the current FY14 XSI aggregate) implies a potential ~$10 share price offering robust prospective long-term returns from current levels.
The shares have been rising and falling, but if this analysis is correct the price could reach A$10 in the long term (appx. 15 years). This means the shares are good value now.
We have published a complete report on Sandalwood Investing ($9.99) which is available at www.amazon.com
TFS owns and manages East Indian Sandalwood plantations in Australia. TFS Corp. shares are traded on the Australian Stock Exchange. You can order the Sandalwood Investing Report at Amazon.com. These shares built-in value with potential for a $10 price over the next 10 years.
“The Intelligent Investor” written by Benjamin Graham and Jason Zweig with Warren Buffet as a collaborator is THE classic book on value investing. This investment book outlines no-fail value strategies without gimmicks. The book is filled with wisdom about investing.
Spotting economic contrasts and trends that create value is a sure way to make investments and savings grow faster than the loss of purchasing power. Ignore what the market is doing. Examine value instead.
Two of my favorite places to invest are in agriculture and water. I hope these sandalwood updates create ideas for investing for you.
Learn more about agri and sandalwood investing at our International Investing Seminars.