ccf business model

Thanks to Tony for taking the time to explain CCF's business model in more detail. I have cut and pasted part of your post, Tony's have Point ..) in front of it. My thoughts have Q) in front of it

Point 1) CFF customers pay Establishment Fees and these fees, when combined with debt finance, is more than sufficient to cover the cost of acquiring land and tree planting, while maintaining a healthy profit margin. These establishment fees are received and recognised in the year of planting.

Q) The increase in profits is due to the revenue from the establishment fee being in excess of the expenses required to establish the plantation.
You also say however that debt finance is required to cover the cost of acquiring the land and establishing the plantation. This would mean to me that you are capitalising the cost of land acquistion rather than expensing meaning you book a profit but cashflow from the establishment fee is negative. This is a fair way to treat the acquisition of land as it is not used up but it is an encumbered asset.

Point 2) In addition, the Company receives on-going periodic management fees over a 15 year period, which covers all debt finance repayments and the costs of plantation maintenance, plus a profit margin. These revenues are not booked in advance.

Q) By the on-going periodic management fees covering debt refinance payments and other expenses with a profit margin does this included repayments of principal or only interest.

Point 3) CCF does not require additional capital from shareholders in order to fund each season’s projects. The business model going forward is intended to become self-sustaining, with revenues from management fees capable of funding anticipated future operating costs.

Q) From this statement it would appear that you would be capable of paying of the principal as well but would initially use this to fund extra plantations instead.

I had no issue with the rest of your response.

The connection I was making between CCF and the previous MIS companies was not because they were both growing trees, it was that their initial sales were cashflow negative due to their need to acquire a land bank, their solution was that they would be able to re sell the same acreage after the initial seasons matured to new MIS customers meaning that sales would be strongly cashflow positive from that point. They ended up going out of business before that could occur as they also had to pay tax because of their strong profitability worsening their cashflow position.

CCF sales from the establishment fee are also cashflow negative despite the strong profitability $800 gross profit per hectare (from the analyst report) as otherwise you would not need debt finance to cover the costs of establishing the carbon sink. You would also need to pay tax on this profitability. I would assume there are extra expenses so profit would be less. On 10000 hectares for 2012 your forecasting 3.5m NPAT for about 5m NPBT so about $500 profit per hectare planted. I know the figures are not exact, I don't have access to them so is the best I can come up with. This means on top of the land acquisition which is partially debt financed you have to come up with $150 cash for tax.

So at present we have the establishment of plantations which is per hectare causing a negative cashflow for the company of the debt finance component + around $100-$240 ($100 is a lower figure for tax $240 assumes gross profit translates fully to net profit)per hectare

At present there are 2 other revenue points.

1) Carbon credits generated after the expiry of the contract with the company who established the acreage. This is 15 years down the track so whilst a good source of free cash flow in the future, you have 15-17 years to wait before this is a reasonable source of free cash flow so if this is where the free cash flow is going to come from the company will not be self funding as you claim.

2) This leave the management fee to provide the free cash flow to fund future expansion. The analyst report gives a figure of $15 for gross profit again this is the only place where I can find a figure. This includes the management fee and includes land cost. If this by land cost it covers the prinicipal repayments as well this is good as it solves the problem of the debt financing of the projects.

This leaves taxation, the government always wants to take their share and they want cash.

We already know the establishment fee is cashflow negative and carbon credits won't produce free cashflow for >15 years so we can't rely on that yet.

$15 of gross profit from a management fee isn't really gonna cover a $100-240 cash a hectare liability unless a significant proportion of the expenses attributed to the management fee are non cash i.e. depreciation of equipment.
Depreciation however should not really be included in free cash flow as equipment gets older and eventually needs to be replaced.

So I am still at a loss as to how CCF will be self sustaining. I look forward to reading the report you release to tease out the figures as if it self sustaining I would buy shares by the bucketload.