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Occam Logic

1,117 Posts.

14

09/02/16

12:33

Post #: 16975277
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Originally posted by TheGoss31 ↑

I agree with sundowner1234 above that the likely reason for the sell-off relates to appetite for risk in this current environment (and in particular default risk driven by debt/liquidity issues).

Objectively speaking (noting i am a relatively material shareholder do believe its long proposition):
- TFC has US$200m of debt which equates to ~A$285m at an exchange rate of 0.7
- At a blended rate of say 10% (11% on its earlier issues, 8.5% on its most recent), that equates to A$28.5m interest servicing costs annually
- TFC has guided to cash EBITDA of ~A$62m for y/e Jun 16, which implies ~A$33m cash flow (pre investing/dividends). This means that from a cash flow perspective, there is not much free cash flow buffer after paying out capex/dividends which is where sellers may be focused.
- On a current market cap of ~$400m and debt of ~$285 = EV of $685m. That implies an EV/EBITDA of ~11x in FY16 (685/62) which may seem high relative to broader industrials (~8-9x is more the norm).
- However, and this is a BIG HOWEVER and differentiating point for, TFC is expected to see a significant ramp-up in EBITDA in FY17 (to ~$80m+). On an FY17 basis, TFC is trading at a ~8.5x.
- This FY17 EV/EBITDA multiple is the real multiple we should be looking at and is arguably undervalued. As Loccam and others have mentioned in this forum previously TFC is a global market leader ~60% of supply, with monopolistic type supply for at least the next 10 years. Given this power, the argument is that a higher multiple (aka a higher price) should be justified for TFC (if you look at regulated utilities as an extreme - i.e. monopolistic type assets, these assets generally trade at >10-15x EV/EBITDA multiples).
- Given this, there is a strong case that TFC should be trading at above a 'market multiple' of 8-9x.

IMO, the Feb/Aug results will be critical to see whether management can deliver on each of the following points:
1) oil/wood yields from its first major harvest
2) prove that the oil prove assumption of US$4500/kg can be maintained with increased supply
3) demonstrate clear progress being made in relation to development of end products/markets (e.g. pharma etc)
4) arguably most importantly in this market (where cash is king), demonstrate it is taking appropriate action to adequately manage cash flow and debt levels. Any positive developments on refinancing the notes would be a good indicator (incl. commentary on reduced rates from the 11% notes)

To the extent it can deliver on all 4 points above, i expect we will see a re-rate over the next 6-12 months as market becomes comfortable this is a cash flow positive company with more than adequate debt cover.

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Nice summary. Personally I think the oil yield question is already answered.

TFC Price at posting: $1.19 Sentiment: Buy Disclosure: Held
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