ccf’s business model revisited

It seems to me that CCF may have a very viable business model; but I’ll come back to that.

First, let’s consider the risks. The industry has effectively been created by legislation and could disappear overnight if legislation were changed. Also, CCF is a new business selling a new product. Thus, it is a risky scenario and CCF could collapse for various reasons.

However, the relevant question from an investor’s point of view is not whether it might collapse, but whether the current share price is too high relative to the downside risk.
Now, let’s consider the upside. The industry has potential to expand rapidly as there are many companies that may want carbon credits and there is much land that is available. Also, it seems there is a role for companies such as CCF to act on behalf of the companies in acquiring suitable land, planting trees, etc. As an early entrant to the industry CCF seems well positioned for rapid expansion.

Now, let's get back to the business model.

The first issue is whether CCF can successfully market their product. Their sales track record demonstrates that they can.

The second issue is whether CCF can price their product so as to make a profit. CCF is very fortunate in that it does not require huge amounts of capital up-front before it can make a sale. Sure, it needs to acquire land, but the land acquisition does not need to be made prior to making the sale. Also, the sales price can factor in the expected cost of the land. A major advantage CCF’s business model is its low overheads. Essentially, it seems to be in the business of negotiating an arrangement and so long as there is demand for carbon credits they should be able to negotiate a profitable outcome. The financial statements to date indicate that CCF knows how to negotiate a profitable deal.

The third issue is whether CCF will bury itself in debt. Whether it will, or not, seems to depend largely on the extent to which the up-front fees paid by the client covers the up-front costs of land acquisition and tree planting. From the information provided in Alto Capital’s 2011 report:
http://www.carbonconscious.com.au/files/19/files/Alto%20CCF%20research%20report.pdf
it seems to me that the up-front fees could just about cover 100% of the upfront costs. This seems a realistic negotiated outcome as the client will typically have much deeper pockets than CCF. If it is true that the upfront-costs are largely covered by the up-front fees then CCF’s potential to expand seems very great. CCF seems much like a property developer that sells off the plans with much of the risk being transferred to the purchaser.

Overall, the model seems very reasonable, but maybe I have overlooked something important.

The major risk I see for CCF is that circumstances may change and CCF may be unable to make new sales and the revenue from managing existing properties may be insufficient to cover overheads and it may collapse.

A secondary risk for shareholders is that even if CCF is very successful its revenue may be very choppy and consequently profitability may swing wildly from one period to the next. This choppiness coupled with low volume of share sales seems likely to result in the CCF share price bouncing around.

Disclosure: I own 20,000 shares in CCF, but I have no other interest in CCF, trees, carbon credits, or politics.

Sentiment: Seemed like a good idea at the time, but I would neither encourage nor discourage anyone else.