August 2018 - State of PSD

As has become my tradition, this post is mostly about me laying out my thoughts - documenting my assumptions and hoping that the participants in this forum will help find errors in my thinking.

This month has been pretty exciting - we've added a new information source - ICN Gateway and the expressions of interest for contractors.

ICN gateway has provided us with a few interesting points:

"An Execution Phase for the engineering, procurement, construction and commissioning phase of the capital works that subject to the finalisation of funding will commence late in the dry season of 2018 or early dry season 2019.  The construction timeline will see construction works sufficiently complete to enable commencement of stocking within 2 years of commencement. An Operations Ramp-up phase, to commence the breeding program and start stocking the farms approximately 2 full dry seasons after commencement of construction."​

This goes with our usual slew of media statements, investor days, reports to the ASX and so on, this is what we know:

1. Phase 1 is 1020 hectares of ponds - which is going to be done in three 'sub-phases'
2. The revenue from phase 1 is going to provide cash flow for the rest of the build
3. Full build-out is 10,000 hectares of ponds and is expected to cost a total of $2bln
4. Phase 1 is expected to cost about 15% of the entire project ($300mln)
5. The company intends to hold about 70% of the completed project
6. Full build-out will produce about $700mln EBITA each year (about $490mln attributable to SFG - Bell Potter claims that the complete EBITA of PSD will be more than $1bln per year)
7. Therefore the company will get about $490mln EBITA of the completed project
8. Today there is about 1647 million shares outstanding, about 130 million options outstanding (including NSK)
9. The off-take partners/investors are expected to buy about 30% of the project itself - with the money being used to build the project
10. The company intends for PSD phase 1 to complete by 2022

We now are in a position to reasonably speculate a timeline to shovels in the ground:

	Column 1	Column 2	Column 3
0	Date	Event	Source
1	August 14, 2018	Contractor information sessions	ICN Gateway
2	August 30, 2018	Expressions of Interest close	ICN Gateway
3	October 1, 2018	AAMI acquires Legune Station - SFG lease of PSD site starts	Announcement 571
4	Dry season 2018	Contractor site inspections/Formal bids	Implied in ICN Gateway
5	Around mid-late October	Some "face saving" announcement that construction has commenced The company is adamant that construction will start this dry season - maybe something like fencing or grading an access road/hard-laydown area around the site "counts"?	Pure Speculation
6	November 2018	Wet season commences - significant contracts awarded	Speculation based on ICN gateway
7	Wet season 2018/2019	Engineering drawings of all the things in ICN Gateway are finalised/approved/etc	Speculation based on how projects run
8	April 2019	Dry season starts - if we're lucky	Google - NT seasons
9	Dry Season 2019	Construction under way	ICN Gateway
10	Wet Season 2019/2020	Unclear: more technical planning for 2020 dry Season?	Speculation
11	Dry Season 2020	Construction of phase one wraps up - ICN Gateway promises "two full dry seasons" for the construction timeline	ICN Gateway/NSK deal
12	November 2020	Prawns grow through "ramp up"	ICN Gateway, EGM investor presentation
13	Mid 2021	Phase one production should be happening	Speculation, based on ICN gateway timeline

I believe the timeline has slipped by a year on account of delays with the NSK deal, and getting the SFG sale sorted out.

Project valuation - this is pure speculation, based on Bell Potter's estimate of PSD's revenue, we can value the project as follows:

	Column 1	Column 2	Column 3	Column 4
0		Optimistic	Likely	Conservative
1	Completed PSD EBITA (projected)	$700mln	$600mln	$500mln
2	Optimistic PE 12:1	$8.4bln	$7.2bln	$6bln
3	Realistic PE 8:1	$5.6bln	$4.8bln	$4bln
4	Pessimistic PE 4:1	$2.8bln	$2.4bln	$2bln

For my purposes, I've assumed that the company's revenue projections for PSD are optimistic. I've found a range of PE for Australian agribusinesses.  This gives us an enterprise value of $2bln to $8.4bln for project sea dragon.

The company is intending to own 70% of PSD going forward.  NSK made the company divest CO2 Group, so PSD is the company's only asset and what this would mean for SFG's value going forward:

	Column 1	Column 2	Column 3	Column 4
0		70% stake	60% stake	50% stake
1	Optimistic Optimistic	$5.88bln	$5bln	$4.2bln
2	Realistic Likely	$3.4bln	$2.9bln	$2.4bln
3	Pessimistic Conservative	$1.4bln	$1.2bln	$1bln

This would value SFG between $1bln and $6bln.  If this is accurate, then we have a long-term share value of 50 cents, and $2.94.  On account of my own financial circumstances, I'd need to start "risking off" in phases around $0.75

If completed, I believe we're likely to see SFG worth as a company around $4bln when PSD is completed - I have nothing to base that on, but a bunch of comparisons.  

Points of concern:

• FIRB approval for the NSK investment (I'm not sure if this necessary, but let's put it here, in case)
• AAMI Group's financing for Legune Station
• "Construction" announcement still hasn't been made
• Building can only occur in dry season
• Dry Season runs from April to November

This is what I would expect to happen:

1. Within the next 60 days FIRB grants approval
2. 30 days after approval, SFG will get payment from NSK
3. "Construction" starts in September - but they will be basic site-works things - powerlines and such
4. A bunch of funding is found over the next year, construction proper happens in the dry season of 2019 and 2020 (April to November)
5. Prawns grow in 2021
6. There is some kind of issue with yield in 2021 (guess - but something always goes wrong somewhere)
7. Phase 2 starts circa 2025.

Obviously the further along this list we get, the deeper into speculation we go.

Based on this, I think SFG might currently be over-priced - but that depends on your risk appetite.  Morningstar says the company is under-priced and is worth about 11.2 cents per share at the moment.  I'm reasonably sure over the next few months we drift back down towards 8 cents - if we fall to around 7.5 cents, I'll top up with fresh cash - but that says more about my risk appetite than the project's valuation.  I don't intend to sell my current holding and wait for the dip.  Although, given I'm convinced it's coming, I probably should.

Long story short - at these price levels I'm downgrading my sentiment from "buy" to "hold".

Remember - this post is more about me getting my thoughts straight than giving anyone advice.  DYOR and good luck.