I'll pile on here and point out that the only brokers that have covered the company value the stock ~$2 - 3+ ps. Regardless of conflicts of interest, these are the people that know the most about the company and their views, models, assumptions etc. should carry some weight. The value derives from expanding harvests, eventual complete ownership of the land/trees and improved yields/survivability. All of these drivers can be stress tested which should reveal that anything around or below $2 ps is achieved through low assumptions and/or a really high discount rate.
When it comes to demand and price I do think there is enough evidence that a global market exists for willing/capable buyers. Anecdotally, you currently cannot purchase a 5ml bottle of "Sacred Sandalwood" oil from Young Living as they are out of stock - note it sales for $131.25USD retail and $99USD wholesale. In Sydney, Lush cosmetics have expanded their retail footprint from little kiosks in large department stores to stand-alone retail shops buzzing with customers in traffic-busy areas within the city - all within a ~3 year time-frame. These are just two examples of concrete evidence of growing demand in end-user markets. This isn't even accounting for the pharmaceutical uses as well as EMEA market, China, India etc. EISO is indeed a differentiated, high-end product relative to substitutes.
I know this may come off as "rah rah" but the point is that the value does indeed seem to be there, which is why this situation is massively perplexing for those that have actually come to understand the product and end-user markets. To 'get' Quintis you HAVE to at least for a moment forget about Timbercorp, Great Southern etc. To be quite honest, mentioning the terms "MIS" and "Timbercorp" to experienced investors in Australia automatically plucks the strings of fear, disgust, doubt and admonishment before Sandalwood is even discussed. You have to get past that bias to consider the unique economic utility of EISO.
Yes, evidence against Frank Wilson and Quintis does indeed appear incriminating. The MIS structure, JC marketing materials, Shanghai Richer Link, the resignation etc. That said, these are all factors of business trying to redefine itself whilst defining a new industry - it's hard and not smooth-sailing. The markets more often than not have priced the company at very low multiples as a result. Is there an unraveling, fraudulent ponzi-scheme here? Probably not. A small, potentially distressed company facing mounting liquidity risk - perhaps that's the happy medium.
The problem I think QIN has come up against is the capital intensive nature of getting this product ready for a wide market. The MIS scheme was used as a way to purchase assets to establish plantations - but the plan has always been to eventually cease that operation and solely focus on the Sandalwood market. Now that the biggest purchaser has disappeared and negative sentiment could slow the inflow of MIS cash, Glaucus' report could prove to be a self-fulfilling prophecy in some aspects. This company may now be peering down a difficult path of credit risk as short term debt obligations grow and covenants may be triggered (by the Moody's downgrade). It appears questionable if any of this would be happening if it weren't for that report, but to be fair perhaps all it really did was speed up the inevitable. Afterall, forestry is indeed a capital intensive operation and EISO does take a particularly long time to convert to cash. In short, you have a small, cash-poor company sitting on high-valued, non-liquid assets.
When you look at it like that I think the stars begin to align and it no longer looks like a zero-sum game where one side is going to be right or wrong. The key is the value of those trees and the production facilities. Perhaps this is a risk that Frank Wilson and the board identified sometime last year and viewed privatization and/or selling to a cashed-up bidder as potential levers.
All that said, NTA per share sits somewhere where the stock currently trades. KKR may come in with a slightly lower view but this of course would be giving away production facilities and intellectual property for free. With EV at $734m, a price tag of ~$1 billion AUD doesn't seem too unreasonable, which implies ~30-40% premium to the equity component from today's price - or around $1.65 ps.
This could be a good deal for KKR (who would essentially be given the Santalis operation for free), but would still be shareholder friendly.. Unless of course you are expecting to realise that $3 price target, in which case I don't suspect you'd be too happy.
Point is, I believe based on the assets and debt levels on QINs balance sheet today there is room for a premium buyout (from today's SP) that could still be a discount and accretive for KKRs Sandalwood operation.
Expand
