QIN - Quintis Limited

Hi, here are some numbers.....not really making any claims as its straight from Annual reports

Keep in mind, the father of 'growth' stocks, Philip Fisher, one of his rules was only buy companies that can grow from operating cash flows

05 Report operating cash flow was $605 thousand........prior contributed equity was $14 million.........in that year TFC issued $8 million of stock

06 Operating cash flow was a mere $1.2 million......TFC issued no shares but took on over 6 million in debt

07 Operating cash flow was a mere $2.5 million.....TFC issued no shares but took on another 11 million in debt

08 Operating cash flow significant at $27 million.....then it gets eaten up by $22 million in 'lands and buildings'.........then TFC issues almost $20 million in shares.......and pays back round $7 million in debt

09 Operating cash flow $11 million......dwarfed by asset expences......then the company takes on over $30 million in debt.......which funny enough......they had to issue some more stock now to keep the bankers at bay

Just writing down these numbers made me troubled cause it was like timbercorp all over again............with timbercorp, the assurance was alway that the debt was going into assets......only the assets ended up being meaningless in a fire sale.....

It's identical here.........there is almost no free cash flow or genuine profit to speak of.....just financial engineering

I hope it turns out well for all holders

Another point to note is that most Financial Planners are scared to sell MIS following the collapse of TC and Great Southern...so their new product sales may struggle in the short term. Additionally all of their plantations are in one location, they will reach a point where there's a shortage of suitable land, or the Sandalwood price will be negatively affected by a sudden large increase in supply when they commence regular harvest.

Re: TFC - TFS Corporation - look deeper $$$$$

Hi team,

One of the reasons TFC is such an amazing opportunity is because 99% of investors at present don't do the full analysis or understand TFC or is business model. TFC is poles apart form other MIS companies. This is why TFC is on a very low PE and will be significantly rerated. In my view as soon as news of Carbon Trust sales activities come through end 2009 calendar year - reduced reliance on MIS (also part of the business strategy...MIS is a means to an end...repeat instututions and fund interest is the model going forward).

Ask yourself the question "how and why would Merryl Lynch a significant global analyst / broker and provider of research internationally and importantly to funds / institutions / soverign wealth funds lead a placement of 28 mill shares in a company that is just another Timbercorp!" Credibility issues? TFC only raised 5 mill from private investors - they didn't need the money, but chose to give private investors an equal buying opportunity (fairness).

The answer to the Merrly question above - is no they wouldn't...and more significantly look at the TFC agenda for their upcoming AGM it states clearly that Merryl not only lead the placement, but the placement was just to Merryl clients!

In terms of the financials - the normal back of the envelope / bush accountant approach does not give you the full picture / understanding. Analysts appear to understand the business model - theoil through the trees.

Have a read of the broker reports on
tfsltd.com.au/shareholders/research-reports/

Again ask yourself...."Given the recent climate - would there be liability issues for Aussie brokers at least if TFC was at all like Timbercorp and they continued to publish reports with such a positive outlook / valuation e.g. $2.79/share?

The answer is clearlly no.

To answer some of your financial related questions.

I agree with you that you want a company to grow from operating cash flows, but using debt as well (if done wisely) is not always a bad thing especially if you have the balance sheet strength and cash flows to support it – which IMO TFC has. TFC has a clear business model and plan to achieve great things - global integrated supplier of sandalwood products (I have always liked the word monopoly).

In terms of having no free cash flow – I disagree with you on this point. Sure they had only $11 million operating cash flows at 30 June 2009 but you are not taking into account the $29.8 million that they will receive from Beyond Carbon post year end and which is sitting in current debtors – this is a timing issue only due to the change in the sales mix – if this cash had been received prior to year end that would have boosted operating cash flows dramatically.

In terms of the $11 million operating cash flows being dwarfed by Asset expenses of $15.5 million – well $8.3 million of this outflow was to buy 100% of Mount Romance. Given that Mount Romance cost them $11 million all up and contributed full year equivalent EBITDA of $3.57 million. A very good buy purchasing a business on an EBITDA multiple of 3 don’t you think?

In terms of debt levels their bank debt is circa $66 million of which $19 million of this amount came bundled up in the purchase of Mount Romance. Stripping out the unearned income and deferred tax liabilities from their Total liabilities – TFC has total cash debts (current & noncurrent) of $97 million which can be covered by current assets of $100 million .So unlike Timbercorp – TFC is not dying of debt by any stretch of the imagination. Also remember historically MIS sales are all done in second ½ of the year – they needed the debt to cash flow their operations until sales came in – under the institutional model this may well change with sales happening in both halves.

In the coming year(s) – TFC will have to buy or lease more land and this may cost around $80 million dollars for an outright purchase. Yes TFC will be raising additional capital to do this as well as taking on more debt. But hey once this is completed – it will have no further pressing asset purchase requirements and in fact the Institutional Investors will be buying the land back off TFC every year freeing up more cash for growth. When this starts happening Rainmaker – you will get your wish of having fantastic cash flows from operations and genuine free cashflows – but you have to be patient.

TFC is nothing like Timbercorp – dig a little deeper - and as I have said before to others, TFC is a large uncut diamond lying their staring you in the face. Pick it up have a good look and off the dust and dirt on the surface (MIS environment) and you will realise a gold mine is sitting in your hand.

Point of disclosure I am a significant holder of TFC and continue to acquire shares.

Small Diamond

Small diamond........you make a few good points like TFC actually diversifying into a 'real operating business' MT Romance....using raised capital......but most of your 'looking deeper' refers to some type of faith we should have in the system......and Merril Lynch............

As for that.........why would Merril Lynch buy one sub-prime loan......or that other global bank Bear Sterns.....which does not now exist....but they do that for their own reasons.....and I rarely agree with their reasons

I'm happy to take on business risks.....but only business risks I think I can understand.......patience gets reward by the market, but not faith

The fact is TFC may develop into a great company and it may be building some great assets....and its earning may actually be 'real'....but I can't tell from the companies' financials

The company reported a profit before tax of $49 million in 09 and $39 million on 08 on operating cashflows of $11 million and $27 million respectively.......

I don't invest in companies like this.........but I realise others do so I wish you all the best

Hi Rainmaker,


I agree with you entirely - most people do not understand the business model and without a full understanding of the model, the a/cs can be very difficult to conclude on. That is why many retail investors are remaining shy at present ,despite positive analyst forecasts etc. This however will change at some point - you can only deny reality for so long.

I think the reference to mistakes of corporates in the area of financial innovation has no relevance for the analysis of TFC. And I agree we as investors should not be buying shares for which we do not understand - this is not faith this is called gambling. In this case again you have hit the nail on the head - TFC is currently priced by wide spread misunderstanding (even with analyst support the common view of the retail investor is - its MIS - run!) and therefore 'faith' is in effect working in the opposite direction - not interested in buying - negative faith . However where there is genuine understanding by the investor - in my mind this only leads to one fundamental conclusion - buy and hold !

Why are they issuing shares? Well they are being very prudent before this year's 'ruler on MIS providers and the 2010 PDS is applied by regulators' AND to pursue growth opportunities e.g land for faster expansion (institutional plantation demand could very quickly exceed land capacity) and for pushing forward on their vertical integration model / strategy. This is all about delivering / meeting the underlying business strategy. Land availability may become an issue....but I would rather have that problem that no buyers. After all the institution model allows for the sale of land to the institutions at market price as part of the package. So TFC unlike other agri land acquirers can afford to bid very competitively. I wouldn't be surprised to see TFC come up with a very novel agreement over the 8000 hec they currently have first right of refusal on in the Ord!

TFC remains very undervalued at present despite having done very well in the worst economic backdrop and mess in the wider MIS arena June 2009.

Junior noted they may have problems given Financial Planner hesitation.

Keep in mind June 2009 was the worst conditions for MIS. The Financial Planners assoc (can't quite remember their name) during the height of the MIS mess reviewed their list of recommendations for MIS schemes. TFS remained one of their few positive recommendations. Also TFS as noted is moving rapidly away from reliance on retail MIS to funds / institutions for plantations. While they may not have sold all allotments to retail investors June 2009, their total plantation sales targets were filled by retail and fund / institutions.

I suspect this year (now selling all year round and not influenced by tax offset buyers in last 1/4 June 2009) there will in fact be competition by retail MIS for residual access - in other words the pool and opportunity for retail investment is narrowing quickly.


SD

Is there any credible data on yields and quality of product from these plantations? As indicated by Rainmaker "they have not harvested a tree yet".

As I recall CALM had done some research years ago but I'm not aware of the results and I think it was only a relatively small plot. What IS of interest is that some company or newspaper clip came out a couple of months back and said they had a genetic test which could tell how much sandalwood oil a tree would produce or, I expect, a 'disposition' to how much it would produce. When I heard about it I thought TFS and ITC would be keen to do some tests-who wouldn't in their position-unless they were worried about the answer...

Sainter said:

As I recall CALM had done some research years ago but I'm not aware of the results and I think it was only a relatively small plot. What IS of interest is that some company or newspaper clip came out a couple of months back and said they had a genetic test which could tell how much sandalwood oil a tree would produce or, I expect, a 'disposition' to how much it would produce. When I heard about it I thought TFS and ITC would be keen to do some tests-who wouldn't in their position-unless they were worried about the answer...

Click to expand...

Yeah they did independent tests 2004, have a look in FULL YEAR RESULTS PRESENTATION 20/08/2009. The results came in above expectations.

isnt the tfs story as simple as supply and demand ?

they have a niche product that a sector in the world demands

if the forest / agriculture experts do their job correctly then the stock is a winner

cash flow is the same as a farmer waiting to sell his produce when mature

Hi there,

Yes there is a level of uncertainty over the oil yields. However TFS continues to collect evidence in support of predicted. This has included sampling trees grown in the ord region (privately held trees, Forestry trial trees and their own trees). Evidence to date supports yield meeting at least PDS assumptions.

Bear in mind that TFS has managed their grower plantations to optimise growth and yield. Others would argue that growth and oil yield are negatively correlated. So the jury is still out on that one. But evidence is supportive.

TFS has demonstrated that oil has started to be produced and suprisingly in trees of a young age. They have no reason to believe otherwise than harvested trees meeting PDS assumption.

Also keep in mind if the oil yields are lower than expected, then the initial impact is on the grower and not TFS. Obviously this could impact on future sales of MIS - reduced rate of return. However the rate of return on offer is significantly above other agri schemes .....Also if rates of oil yield turn out more positive, then TFS reaps 30% of additional profits.

Yes there was an article in the paper recently on the discovery of the gene responsible for triggering oil production. This is not the gene for production, or for looking at current oil content. However the finding of this gene will be significant in terms of tree selection of trees going forward - seedlings etc. Big additional bonus.

TFC is in the business of producing oil that the world is in short supply of and prepared to pay $$ for (western counrties for perfume and the east for religious / cultural practices). However TFC doesn't just want to be a supplier of the raw commodity (which has being going up in price >20% pa)...they want to be in the value added end of the supply chain. That is soil - to oil - to product. There is huge potential for them to make $$$$ if they effectively control the global supply of sustainable sandalwood and own manufacturing and distribution facilities for final products.

They are currently looking into the pan (mouth wash / masala) market middle east and asia. The pan mouth wash market is a $3 billion market alone with sandalwood mouthwash selling at a premium. Consider the value captured by TFS having a small ammount of sandalwood in each bottle and you control the liquid gold that goes into this ....huge.

Bear in mind that TFC is being very smart and tying up competitive interest in its products. They have signed up Lush cosmetics, French perfume house Aberville etc and now into the Middle east .....

They are also growing trees and buying land in the Ord region....the future fruit bowl of Australia....I would like to own swags of land there and be growing high value products with no water limitation!

SD

From end year presentation August 2009:

•Testing supports PDS assumptions for yield results.
•2004 -Independent testing on 14 yoKimberley-grown Sandalwood yielded the following results:
•Oil quality to international standard ISO 3518 Indian Sandalwood oil.
•In 2008 TFS tested Kimberley-grown Sandalwood trees aged from 8 –14 years (8 year old trees TFS-grown; remaining from private growers).
•Superior growth rates for TFS-grown 8 yotrees: -Double the size of private 14 yotrees in this test
-75% the size of 14 yotrees in 2004 test (at only 56% of the age)
•Yields from 8 yotrees at harvest are expected to be consistent with the PDS.

Hi Smalldiamond,

Thanks for your comments on TFC, very helpful in understanding more about the company.

You're welcome,

Any questions please feel free to fire these my way and I will answer and do further research if needs be. As noted I am a committed investor in TFC and welcome alternative views as this serves to challenge my own ongoing assumptions.

This is not about being right / wrong but sharing considerered thought.

Regards
SD

Hi SD,

Do you think you can comment on the demand and supply situation of the indian sandalwood market. The way I understand it, when harvesting begins, TFC will be producing 6.5-7.5ktons, and current demand is only about 8ktons. Don't you think that is going to have a strong negative impact on the price of sandalwood? If so, do you think they will have trouble getting people to grow them once harvesting starts?

Thanks

p.s I have taken profit on this some time ago and currently do not hold

Thanks for the feedback and clarification on the gene test guys. I do not hold TFS but I own a few sandalwood plots through ITC (Elders).
Gene test would still be handy for the trees already planted-to see if they're duds or potential winners re oil producibility.

As with all agricultural schemes, there is still an element of risk. It is heightened in contrast to , say, wheat, which is very much a tried and tested crop. There is still a lot of uncertainties in the sandalwood game. Obviously I hope it works out well.

Hi there,

In terms of supply and demand the best way to approach this question is from a macroeconomic perspective.

It is clear that sandalwood is an important commodity and has been since adam and mohamad were boys. The simple fact is that sandalwood oil is found in 70%+ of world manufactured perfumes (its a very effective base / frangrance fixative) and other cosmetic products. It also has very significant cultural and religious support and use. Aside for products made from oil, the wood itself is very valuable and is used in a variety of products through to incense sticks (spent charge after distilling oil form heartwood).

In terms of supply it is clear that natural stands of Indian sandalwood are declining rapidly through unsustainable forestry practices. The native tree takes upwards of 50 years to mature before cutting. The tree is also obviously of very high value so despite government efforts to manage deforestation e.g in India and other parts of the world deforestration continues. There also remains significant levels of poaching and illegal trade going on in the background.

This of course has introduced an ethical dilema for the western perfume houses who for marketing reasons do not want ingredients associated with such activities. They would prefer to acquire supplies of 'green ingredients' and on a contract basis / continuity of supply.

So I do not see the demand for ethically and sustainably grown indian Sandalwood demand decreasing. In fact with the option of continuos supply there is likely to be competition between the perfume houses to gain access to this supply. And what si the TFC strategy...entering into supply contracts well in advance - lush, Amberville and now the Middle East.

Macroscopically as you would be aware globally we have a number of countries that are stepping into the spot light, to have their day in the development sun. We of course have India, Asia, China and the middle east. Traditional western markets are not the growth future they once were.

With significant population, development and growth comes increasing numbers of middle class with increasing amounts of discretionary $$$.

Now sandalwood oil, its wood and products have been used by these cultures for generations. And the use of sandalwood is less of a nice to have, but more of a must have for religious and cultural reasons. Are you aware that the Koran sanctions sandalwood as one of the few approved perfumes! Hindus require sandalwood religiously and the Chinese were traditionally huge consumers (well until communism).

So in summary...I could go on, we have a situation where sandalwood is diminishing in supply macroscopically, increasing wealth of traditional users, a market desperate for sustainable and continuity of supply with a swag of religion and culture thrown into the mix..

Do I think prices will go down....no I don't think so. Any additional supply will be taken up by the market and in my view there will be a premium paid for product that is certified sustainable. Sandalwood is actually a listed endangered species - CITES.

TFC will, if all goes according to plan, be for the next 15 -20 years the biggest grower of Indian sandalwood outside India and looking to be the only intergarted global supplier of sandalwood, its oil and products.

TFC named top 10 stock of quality stocks:


Link www
tfsltd.com.au/news/view/30/the-top-stocks-to-survive-the-crisis/

SD

One of TFC directors obviously thought the price has held up well........just sold more than half a million shares, ironically just after the company tapped the market for capital......I'd choose the Bently personally

Hi there,

Refer announcement:

tfsltd.com.au/library/file/ASX%20Announcements/Supply%20Agreement_ViroXis_281009.pdf

This announcement is real exciting....the supply agreement is at premium to spot! This says a lot - it's again about securing supply of a rare commodity. If TFC can move further into the medical demand arena and with stringent source quality control, then TFC can demand significant additional cash for its oil.

Of course as I have said before....they are setting up a number of supply contracts at present (all can see this) east : west : perfume : religious : medical : costmetics.....

I can not think of a better position to be in than becoming a global monopoly in effect for sustainable sandalwood oil and with customers falling over themselves for the supply!

These supply contracts wil also underpin MIS investor interest and more importantly fund / institution investments through Carbon Trust and multi year plantings.

I also hope your read the whole report....note the comment at the end.

"In 2009, TFS entered the prestigious Forbes Asia Pacific's ‘Best Under a Billion’, which recognises the Top 200 companies from more than 25,326 publicly-listed firms in the Asia/Pacific region with revenue of less than US$1 billion."

The market is being so dumb at present with TFC...at some stage someone out there must wake up. In my opinion when Carbon Trust activities / results come in there must be a re rating.

How many positive forecasts / views for TFC can be printed and the market refuses to believe what's staring them in the face....a diamond! Not an MIS model like Great southern etc..

Re: TFC - TFS Corporation - exapnding into India

Sandalwood grower expands Indian marketREBECCA LE MAY
SMH October 30, 2009 - 7:04PM
AAP

A West Australian sandalwood grower is expanding into the Indian market where the fragrant plant has been all but denuded amid growing demand for its pharmaceutical powers.

TFS Corporation Ltd says sandalwood plays a major role in its Indian culture, religion and personal hygiene - opening up a ready market for the Emirates-backed company.

TFS says it has the world's largest sustainably grown plantation of Indian sandalwood, the sought-after variety named santalum album, at Kununurra in Western Australia's far north.

While native WA sandalwood, named santalum spicartum, has been exported from the state since the 1840s, it is a cheaper, inferior variety mainly used in incense and perfumes.

TFS also processes this species at its Mt Romance plant at Albany in WA's south.

With Indian sandalwood oil trading at more than $US1.7 million ($A1.85 million) a tonne on the legal spot market, TFS is throwing its efforts into its 2,500 hectare Indian sandalwood properties in the Kimberley region of WA.

It was oil from the santalum album species that TFS on Wednesday agreed to sell to Texas-based biotechnology firm ViroXis under a multi-million-dollar deal.

This was TFS' first commercial-scale contract with a pharmaceutical firm.

ViroXis will purchase up to three tonnes of the oil a year to develop a botanical drug for use as a topical treatment for viral skin infections including human papilloma virus, which can cause cervical cancer.

"If they are successful (in commercialising the drug) ... it opens up a very big supply market for us," TFS executive chairman Frank Wilson told AAP.

"There's real potential to this market."

Mr Wilson said Indian sandalwood was starting to be investigated by Western medicine after long use in Chinese herbal and Indian Ayurvedic medicine.

Sandalwood's many uses in personal hygiene, such as chewable mouth fresheners that are popular in India and Pakistan, represent a potentially huge market for TFS, he said.

Artificial sandalwood oils are used as a flavour and antiseptic in such products but cause mouth ulcers.

"Because of the dearth of natural sandalwood from suppliers in India, a lot of synthetic and other substitutes are used and there are significant adverse affects on people's health as a consequence," Mr Wilson said.

"The market for natural sandalwood in these products, a healthy product that they will love, is enormous.

"Probably the biggest single market for sandalwood oil in the world is in the mouth freshener market."

Mr Wilson said TFS was poised to penetrate the Indian market through a joint venture with Dubai-based Emirates Investment Group, which is privately owned by a member of the ruling family of Sharjah.

Mr Wilson said he expected TFS would attract other major Middle East investors as it moved away from managed investment schemes (MIS) so sullied by the high-profile collapses of Great Southern Ltd and Timbercorp.

"We're rapidly moving out of the MIS space," he said.

The tax effective schemes were appropriate for start-ups but had been over-relied upon by some agribusinesses, which had lost focus on what should have been their top priority - growing products.

"Great Southern and Timbercorp have caused enormous distress to a lot of people and they are an embarrassment to companies such as ourselves who can't help but be grouped with them.

"But our business model is entirely different.

"We use MIS as a means to an end. MIS has been a great way of building a good business.

"But fundamentally, our business is about growing sandalwood, processing it and producing oil and other by-products.

"We're not tarnished with the Great Southern stigma anywhere else in the world."

Rainmaker2000 said:

One of TFC directors obviously thought the price has held up well........just sold more than half a million shares, ironically just after the company tapped the market for capital......I'd choose the Bently personally

Click to expand...

Not all Director sales are for reasons related to the company its performance or the future..... SD