director spends $86,337 on market , page-21

Thanks for the replies so far.

I have had a second glance over the analyst report but it still fails to address the elephant in the room - i.e. how does the revenue vs cashflow model work. The analyst himself probably doesn't understand it as I see there are no cashflow projections in the report. How the analyst can say that CCF generated "positive free cashflows" I really don't understand!!

However the analyst report did have some useful numbers. CCF expect to report a $800/ha *gross* profit per hectare on design and plantation fees. However, as mentioned by other posters, this excludes land acquisition costs of $875/ha. So even assuming that the client pays cash upfront to cover all seeding costs, CCF will experience a ***cash*** loss of $75/ha. (That's $0.75m on 2012's 10,000ha planting season). The loss will be greater if the client doesn't pay all the upfront seeding costs (however I’ve assumed they will). And on to that we can add selling, general and admin expenses which are deducted from gross profit as per usual which might add ~$4m pa depending on the amount of operating leverage. So the total cash outflows might again be ~$5m pa in FY12, and larger if customer payments are staggered for planting.

However CCF, by recording the land as an asset at cost, should be able to report large profits even while bleeding cash. That is, a ~$5m EBIT loss could translate into a $4m EBIT profit if land acquisition costs are excluded (i.e. 10000 ha x $875 = $8.75m). Subtract a little interest and assume minimal tax (or even a small tax refund as per last year), and I can see how they get to $3.5m NPAT guidance despite the significant cash outflows.

The accounting profits therefore rely on the $875/ha carrying value being accurate. It might be appropriate if we assume a carbon scheme exists and the price of carbon holds at current levels for the next twenty years (if either of these conditions are not me the land is probably not worth anywhere near this amount). However, it will take CCF a full 14 years before it gets access to the cashflows from the carbon produced by the land (the clients get access to the carbon credits between now and then). This raises the prospect that CCF will bleed cash for the next 14 - 20 years (!!) until its cashflow profile matures (although over that time it will become an owner of large tracts of marginal WA land).

This business model will obviously require very large amounts of capital from shareholders, as well as a high level of long term political support for the ETS to payoff.

Cashflows, even once they start to come, will hardly be exciting. Based on management expectations for the scale of the planting season for 12,000 ha, and the analyst estimates that the cash costs to purchase + seed the land of $1800/ha, then CCF will face a cash outlay of at least $21.6m this planting season. According to the analyst note, this $21.6m of capex produces EBIT of $1.56 - $3.6m from 14 years from now (depending of course on the price of carbon at the time). Assuming tax of 30% and that the project cost (i.e. the land) is 50% funded by CCF equity holders, then the cash ROE would be 10 – 23% (i.e. $1.1m - $2.5m NPAT / $10.8m equity), which is relatively poor given the time you have to wait for the cash to come in. This low return on capital suggests CCF deserves a low PER multiple despite “blue sky” growth rates.

CCF's guidance for spectacular growth a couple of weeks ago included no hints as to how it plans to fund that growth. The $24m NPAT they hint at for FY14 assumes 30,000 ha are planted and is somewhere close to the maximum 40,000 ha capacity the analyst report alludes to. Using the same numbers as above then the cash outlay will total $72m in FY14. The company's share could be slightly less than half that i.e. ~$35m, to fund plantation acquisition.

It's hard to see how CCF can fund this kind of massive investment without continually tapping shareholders. So while some posters have suggested CCF will be "on a PER of 1x in FY14", they are failing to account for the dilution that will be necessary to achieve the projected profit growth. Indeed, $35m is more than CCF's current market cap!

I hope this summation is wrong but if correct, CCF does not appear to have an attractive business model, and involves very high risks. The big winners out of all this are more likely to be the farmers selling the land to CCF and other carbon companies.