Overview: TFS Corporation Ltd (“TFS”, “the Company”) is an Australian industrial company focused on the production of Indian Sandalwood products. It controls the world’s largest ethical and sustainable supply of Indian Sandalwood, a $1billion market characterised by exhausted natural reserves. Our last advice was a ‘buy’ recommendation in February 2013 at a price of $0.56.
Catalysts: TFS has achieved average top-line growth of 31% while NPAT increased 57% p.a. over the past four years. We expect increasing harvest volumes, market validation, and capital management initiatives to sustain the trend. With harvest volumes scheduled to rise 10x in FY16; enhanced earnings quality and transactional endorsement of consumer demand could galvanise interest towards the stock. We also see an opportunity for TFS to enhance its balance sheet profile via refinancing of its US Dollar bonds.
Hurdles: Historical development of the Company’s plantation estate has been capital intensive and there is no guarantee that external funding requirements have been eliminated. Recent acquisitions may result in integration risks and operational challenges. The Company’s capacity to extinguish debt through cash flow appears constrained and there is no guarantee that these long-term debts can be refinanced.
Investment View: TFS offers profitable exposure to the Indian Sandalwood market. We are attracted to the Company’s growth trajectory, strong market position, and high competitive barriers. Whilst capital intensity of its operations and external funding requirements are principal risks, we expect shareholders to be rewarded as the Company’s transition towards a more diversified, consumer-driven earnings mix becomes salient. Offering a combination of capital growth and modest income, we resume coverage with a ‘buy’ recommendation.