Short seller Glaucus queries Quintis oil price after grower's writedown.
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Frank Wilson will defend a class action that has named him and Quintis as targets. Rob Homer
by
Vesna Poljak
The hedge fund that successfully shorted sandalwood grower Quintis has questioned the company's decision to leave its sandalwood price assumption intact when it slashed the value of its plantations by $300 million.
It has also emerged that the former TFS is the target of a second class action brought in the Federal Court, this time by Gadens.
In its annual accounts filed belatedly on Tuesday, Quintis reduced the value of its 3228 hectares of Indian sandalwood plantations, booking $307.4 million of pre-tax impairments, causing the company to post a loss of $416.7 million for 2016-17.
That leaves the value of Quintis' own plantation interests, known as biological assets, at $342.8 million which is based on a revised discount rate range of 15 per cent to 17 per cent from 12 per cent to 14 per cent, and a reduction in forecast heartwood yield and projected oil content.
Quintis assumes a sandalwood price of $US2800 a kilogram and left this unchanged as one of the key inputs in its audited accounts.
But Glaucus Investments, which published critical research on the former TFS in March this year, argues that the $US2800/kg figure should have been lowered too. If Glaucus is correct, that implies the plantations are still overvalued.
Fund manager Soren Aandahl saw the revisions made by the company this week as the "tip of the iceberg".
"Quintis marked down the value of its plantations by 45 per cent, but it only modified two key inputs in its model: the yield and projected oil content," he said.
Glaucus argues that even after revisions those "are still too aggressive" relative to historical performance. "But the more important point is that Quintis barely moved its price assumption. This was, in our opinion, the most ludicrous assumption of all."
There is no spot price for Indian sandalwood, of which Quintis is the world's largest grower.
"If Quintis admits that the value of the trees are 45 per cent less than previously reported, and the company still has not changed what we believe is the most unsupportable data point in its model" – referring to the commodity price – "it shows just how tenuous even its current valuation is. Put simply, we think that despite [Tuesday's] admissions, Quintis' valuations have much further to fall."
Challenging the hedge fund's view, Quintis disclosed in June that it sold 2.85 tonnes of oil for $US8.55 million to the US essential oil direct marketing company Young Living. That is 33 per cent lower than its previously disclosed contracted price of $US4500/kg, struck at $US3000/kg. Young Living got the discount because Quintis was cash-strapped following a sharp drop in plantation sales and was willing to conduct a bulk sale.
Quintis' auditor, EY, noted that it evaluated "the sandalwood oil and implied heartwood price" in its appraisal of the latest accounts.
Meanwhile, law firm Gadens is behind the latest legal action targeting the company, which names Quintis founder and former managing director Frank Wilson as a defendant too.
"Quintis denies liability in respect of these allegations and will defend the proceedings," it told the market on Thursday. Mr Wilson, via a spokesman, said he would vigorously defend the allegations made against him and denied any wrongdoing.
"The class action alleges that Quintis and Wilson made misleading and deceptive statements from 26 February 2016 regarding the company's key supply contracts and performance forecasts and contravened its continuous disclosure obligations from June 2015," Gadens said.
Its action is open to shareholders who acquired stock between June 2015 and May 10, 2017.
