Grower and Investor's Perspective

This post follows on from comments in https://hotcopper.com.au/threads/water.3616971/
but as off topic (not water related!), thought I'd throw it in a separate thread

@kevvy, I'm a grower also in TFS Sandalwood Project 2007 and a share investor.

Grower Perspective
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As a grower I invested $105K after GST deducted with a tax benefit of 43,575 in year 1, so net cost 61.4K. Plus over the last nine years a net 60,252 after tax. So total 121.677K. I have excluded the commission on the initial amount which was rebated by my financial adviser at the time as not all investors were fortunate to invest with a rebated commission.

These ten lots were valued at $319,759 in the latest (2016) report. So this works at a not too shabby CAGR of 11.3%.

Not great compared to the estimated IRR of 18.24% and well below what my shares have done at 23.07% p.a. over the last 8 years (including the current impact of QIN)

...but not too bad either - if we can believe those valuations which were audited by Ernst and Young ( which is another discussion entirely - but equally the major insto investors have) and supported by audited sandalwood market sales.

Yields and Returns
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Some of the earlier plantations don't have yields that matched upto the original estimates, but the later ones do.
TFS SW Project 2002 as one of the first official TFS ones (after the East Kimberley project no 1) was arguably one of the riskiest to therefore invest in and a smaller one with only 317 lots. Each lot was worth just over 43K in 2016 accounts.

In November 2015 TFS wrote in their report to growers that for some of the early projects such as TFS 2000, 2002, 2003 they reduced the heartwood estimates. TFS2 (not an MIS scheme) was also below expectations. 2004-2006 had lower survival rates than expected - this show the risk of the investment. In the FY2015 update for example, 2003 Project had 69% survival rates versus 52.5% for 2002 Project for example.

My own project 2007 had 63.8% rates but the following year 2008 has 84.7% rates. The next five years 2008-2012 averaged 84.42% survival rates.

That's the risk of investing in a new scheme I guess and why the tax benefits are there in the first place to encourage risk capital to invest for the long term. Tax was my prime concern getting into this.

Secondary Market
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As a grower you may have also received notices asking if you wished to sell your plantation assets as there have been institutions interested in buying more established plantation assets, presumably because the value increases more exponentially towards the end of the 13/14 year period and the risk is higher in the earlier years as a grower and the instos would not have the same tax benefits either.

As growers - our risk is mitigated in the event of VA as TFS Properties "lodge a caveat with the Department of Land Information to register interests in your Sandalwood Lots."

The ten lots were originally estimated to produce revenues of 1.86mill in 2022. Let's assume 50% worse than this, it's still 900K and way more than originally invested.

As an Investor
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I also invested in their shares part way through the current predicament they find themselves in (post the launch of the short sellers's biased report). I had invested previously in the past attracted by the business model despite low liquidity at the time in the share trading.

As a value investor this is how I invest after the market overreacts emotionally - This is how my fund has achieved 23.07% p.a. over the last 8 years without leverage and outpacing most super funds. Recent results over the past three or so months include NWH - up 185% as of today (could've been more if I'd topped up at 5c per share. It's currently 99.5c. But I'm strict on capital allocation). VTG - up 84.3% and RFG up 13%. QIN down 43.63%

I could be wrong in the value of course. DYOR. But if they get the cashflow sorted and get a few runs on the board with some positive news, then that SP will bounce up so quickly. People were very emotive and negative about VTG in a similar way to QIN a few months ago and look where that's gone. BOOM!

I would say you should not be concerned about your QIN investment if you have stuck to a proper sound capital allocation and diversification strategy. It's what allows me to select value stocks and sleep at night. I would in fact consider topping up at 29.5c if the stock were trading based on the facts available. I get greedy when others are fearful as a great man once said.

I also see the value in the ongoing revenue streams from growers - even if the grower options to defer it is an asset to the company. So each year I personally pay 15.5k to the company and the other growers in my scheme and the many others are billed this amount pro rata in line with their holding or agree a contract for deferral.

For my plantation alone with 3,196 lots this amounts to almost $5 million in revenue / cashflow.
Presumably yours is the same - maybe higher as in later years @kevvy?

Across all the projects this is a not insignificant amount.

QIN currently either collect that money or agree to a deferral and become entitled to a percentage of the harvest. This agreement is outside the scope and a variation of the original contract in some of the projects between growers and QIN (or TFS as they were) so QIN obviously saw the value in taking a percentage of the growers' proceeds in agreeing to a deferral variation.

They could cease this and as a source of cashflow collect the original amounts going forward generating significant cashflow. If anyone from QIN is reading this, why don't you consider this? It means lower profits in the future but possibly the current conditions warrant this.

Across all the plantations this would be a not insignificant sum of money and presumably originally designed as a source of cashflow while the trees were growing but TFS decided to monetise this by holding the assets for themselves where growers opted to defer. Clearly showing a strong belief in the harvest value estimates.

It seems they have a lot of work to do as a company but there are options which haven't been discussed much that are still available to the company to boost their current cashflow.

So I think fundamentally the value proposition to an investor is sound and to a shareholder there is potentially a lot of value on the table. Like VTG, many will be scared off, but that fear is an opportunity. The smart day traders will have ridden it down, exited and then buy back if/when it goes back up.

Interested to hear from any growers their perspectives especially on deferral and the cashflow to QIN perspective.

Apologies for the length - started off as a simple comment!