speculative buy (from buy) a lot of moving parts; revise ... · pdf fileeps adj&dil (auc)...

Quintis Ltd

Forest Products

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and allthe companies and securities that are the subject of this report discussed herein.

Australian Equity Research1 May 2017

SPECULATIVE BUY↓from BUYPRICE TARGET A$3.38unchangedPrice (1-May)Ticker

A$1.14QIN-ASX

52-Week Range (A$): 0.98 - 1.83Market Cap (A$M): 442Shares Out. (M) : 388.1Dividend /Shr (AUc): 3.0Dividend Yield (%) : 2.6Enterprise Value (A$M): 630Cash (A$M): 90.6Long-Term Debt (A$M): 278.5

FYE Jun 2016A 2017E 2018E 2019ESales (A$M) 171.8 214.6 224.1 232.3EBITDA (A$M) 62.2 81.9 86.0 90.7Net Income Adj (A$M) 16.7 33.8 36.8 39.9

EPS Adj&Dil (AUc) 4.1 7.6 8.3 9.0

DPS (AUc) 3.00 3.00 3.50 4.00P/E (x) 27.7 14.9 13.7 12.6Equity FCF Yield(%) 0.9 5.3 9.4 11.8

Book Value /Shr (AUc) 192.5 224.9 247.1 271.2

Net Income (A$M) 90.4 88.2 99.5 109.1

1.8

1.7

1.6

1.5

1.4

1.3

1.2

1.1

1

Jun-16

Jul-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

QIN

Source:�FactSet

Priced as of close of business 1 May 2017

Owen Humphries | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2702

Lowering Recommendation

A lot of moving parts; revise rating toSPECULATIVE BUY (from BUY)In recent weeks Quintis’ (QIN), formerly TFS Corporation (TFC), has experienced a sharpshare price fall following a research report released by a US-based activist fund. Keyquestions raised in the report were around QIN yield assumptions, price expectations,indicative end market demand (largely non-paying Chinese counterparty) and marketingdocuments by a plantation investor (Jaederburg).The board issued a response which provided substantial detail on its customers/contracted price, but also highlighted that its large Chinese customer, Shanghai Richer-Link (150tn pa), has not purchased any heartwood product in CY17 and is potentiallyunder investigation by Chinese authorities for custom tax avoidance. The company is nowseeking a new distribution partner in the region which we see as a critical milestonesto dispel investor fears around end market demand and external price verification. QINannounced it is in advanced negotiations with a new heartwood buyer followingthe release of a media article over the weekend. While no specific details werereleased, it is speculated the contract will be with a joint venture between Layn NaturalIngredients (Not Rated, 002166:CH, mkt cap. A$950m) and a private individual. Themedia article highlighted both parties will initially contribute $4m as working capital tothe JV which we suspect will be the initial payment to Quintis prior to Jun-30. We suspectthe arrangement will be to purchase up to 150tn pa (US$18m) of heartwood at similarprices (US$4,500/kg oil equivalent, US$150/kg heartwood) until 2021.The unit economics of Indian Sandalwood is what attracts us to Quintis as aninvestment. Unlike other forestry investments that failed in Australia, the incrementalrevenue of the commodity (US$4,500/kg [A$6,000/kg, Galderma, Young Living etc])is substantially higher than its aggregate cost of production (A$500/kg oil [A$150k/hacost, 327kg oil per ha, figure 2]) with large barriers to entry. As tree survival and treeyield on early plantations were well below expectations (figure 1), the marginal cost ofproduction on these plantations were elevated. We estimate a marginal cost on the CY16harvest at A$1,290/kg for oil (US$967/kg, CY17E:US$1,334/kg, CY18E: US$881/kg,figure 2) which remains well below the contracted price. As with any 15yr investment,external capital has been required to bring the asset to maturity.Given QIN's book value of A$767m (A$1.94ps), the share price implies an oil price ofjust US$1,363/kg on its directly owned hectares (~2,600ha). In our view, investorsare questioning the following; is the current Indian Sandalwood heartwood/oil priceartificially high in the short term while supply is constrained? Will the price be reviseddownwards to below the cost of production over the long term as volumes ramp up(>2022) and make the business unprofitable? Is the Indian Sandalwood market largeenough to fulfil QIN’s effective monopoly supply at a price greater than A$500/kg- A$700/kg (US$350/kg-US$500/kg). QIN’s largest institutional investors (GMO LLC,Abu Dhabi IC, Harvard Endowment Fund, Church of England, etc [according to multiplemedia sources including The Australian]) agree with the positive outlook for demand,as does McKinsey and Co., which has quantified an indicative heartwood demand of16,900-23,500tn heartwood by 2025 at prices at or above >US$4,500/kg.

For important information, please see the Important Disclosures beginning on page 8 of this document.

To us, what is clear from market sentiment, however, is QIN has done a poor job

at reassuring investors on the size and depth of the Indian Sandalwood market

and medium/long term pricing assumptions. Given the large number of moving

parts and uncertainty over these matters over a relatively short period of time (new

sales contract and price into China channel, change management and business

outlook, impending change of control transaction/management buyout, warrant

exercise prior to Jun-18, Santalis IPO and valuation received, exercise of

plantation put options etc.) we revise our recommendation to SPECULATIVE

BUY.

Resignation of CEO Frank Wilson to facilitate a potential buyout. Frank

Wilson, who founded Quintis in 1997 and currently is the largest shareholder

(13%) and individual plantation investor (415ha), announced his resignation to the

board. Mr. Wilson’s press release stated he resigned "after receiving

an approach... by a well-funded, credible party with a view to making an offer to

Quintis for the shares Mr Wilson does not own". While there are parallels to

SurfStich (ASX:SRF, Not Rated) Mr. Wilson has been a continued investor in the

equity and plantations over the previous three years.

The board announced it has not received any proposals to date; however, it has

been stated in media articles that Mr. Wilson is working with a number of potential

parties as well as engaging a large Investment Bank as his advisor. We see the

attraction of a potential management buyout given the transition to product

revenues over low-quality plantation/establishment revenues and the potential

price paid (EV A$615m/US$460m) given the opportunity to produce >$150m cash

EBITDA in 6yrs as product revenue ramps up and the Indian Sandalwood price

holds. In the interim, Julius Matthys, a former senior executive with BHP and

current board member, has been appointed CEO. Mr. Matthys was on the board

of QIN from 2003-2005 and rejoined in 2011.

Delayed product revenues to China to potentially see lower plantation sales

to investors in 4Q17 and we therefore see downside risk to QIN’s FY17

EBITDA guidance (>$78m Cash EBITDA). CY17 was explained as a

transformational year as the company removed its reliance on third-party

establishment fees to cover its overheads and shift to higher quality and

predictable product revenues. The 4Q has always been QIN’s largest for

plantation sales (costs sunk 1Q-3Q), but the negative and very public press

articles, delayed shipments to the Chinese customer and resignation of its CEO

are likely to impact the group’s FY17 plantation sales, in our view. We await an

update from the company (likely July) following a review of the business/outlook

by the incoming CEO before adjusting our forecasts, valuation and investment

thesis. We note prices on establishment fees have been increased +40% over the

previous two years.

Pharma channel progresses, however ignored by the market. QIN also

announced Santalis expects to initiate Phase 3 trials for the treatment of HPV skin

warts within twelve months. This follows a meeting and written feedback from the

FDA, with Santalis having a “well-defined U.S. regulatory pathway to move into

Phase 3 for the study of Quintis’ Sandalwood Album oil to treat HPV skin warts in

a pediatric population” to which there are no approved prescription drugs to cure

HPV. The market size is estimated at >US$2.9b. Santalis has three on-going

Phase 2 programs for dermatological products containing Indian Sandalwood

(psoriasis, eczemas and molluscum contagiosum), plus a further Phase 2 trial for

oral mucositis.

Interestingly, Santalis announced the Australian Patent Office has issued patents

containing sixteen claims covering the use of sandalwood oil compositions to treat

a variety of cancers including leukemia and solid tumors. We currently ascribe a

negligible value for its pharmaceutical subsidiary which is seeking a potential IPO

in FY18.

Quintis LtdLowering Recommendation

Speculative Buy from Buy Target Price A$3.38 unchanged | 1 May 2017 Forest Products 2

Resumption of trade to Chinese customer or new supply agreement

required to allay pricing and end market demand fears. The negativity on the

stock is exacerbated by the non-fulfilment by its largest customer in China during

CY17. The company reiterated its product sales guidance of A$45m-A$55m

(US$15m in China, 100tn) is not dependent on further sales to its current Chinese

customer. The change in customer is a key catalyst to reverse the negative

sentiment towards the stock with a focus on the price received. Fortunately for

QIN, Indian Sandalwood is not a perishable commodity, so we expect payment to

occur albeit potentially delayed.

Potential upside catalysts to the share price:

o New long term supply agreement with transparent/credible Chinese

customer at equivalent heartwood prices (~US$150/kg).

o New institutional plantation investors.

o Trial results from its pharmaceutical subsidiary and progress on its IPO.

o Formal takeover by former CEO Frank Wilson with private equity partner.

Potential downside catalysts to the share price:

o Downgrades to FY17 cash earning guidance driven by lower 4QFY17

plantation sales/product revenues.

o Lower pricing terms on new Chinese supply agreement.

o Exercise of put options placing risks to TFC’s balance sheet.

Put options back in the limelight. In 2014, QIN granted a put option to an

institutional investor, where the investor could elect to sell 400ha of plantations

back to QIN at a pre-determined price (A$33.9m). It appears the put option has

been rolled from Apr-17 into either Jul-17 or Dec-17 assuming there is no change

of control transaction. If the put option is exercised in Jul-17 the price remains

unchanged; however, if the put option is exercised in Dec-17 the nominal amount

increases by 6.25% to A$36m. If there is a change of control transaction at the

group level, the put option can be exercised prior to Dec-18 with a settlement

value of US$34m (A$45m). The put value of this investment is at a circa 50%

discount to the implied book value at US$2,800/kg.

The primary drivers of our valuation for QIN are a) plantation yields; b)

Indian Sandalwood heartwood/oil price; and c) currency (AUD cost base and

USD forward revenue base). We remain comfortable with QIN’s audited yield

assumptions (PWC, Enst & Young) following a number of site visits and a stable

yield revisions profile over recent years. The large unknown remains the

oil/heartwood price with a resumption/new long term supply agreement required

as the majority of its CY16 harvest remains not under contract.

Figure 1: QIN audited yield profile and revisions over the previous four years (inventory count)

Source: Company reports, Canaccord Genuity estimates, Quintis grower accounts

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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2028 2029

tn/ha CGAu Yield Revisions(tn/ha)

2013 Grower Accounts






Interestingly, our analysis of QIN’s balance sheet suggests the current share price is implying an Indian Sandalwood Oil price of just US$1,363/kg on its direct hectares owned (~2,600ha). This is calculated by adjusting its biological

asset on balance sheet to marry the market cap to its book-value. As illustrated below, this essentially prices the stock at below its aggregate cost of production on early plantations. We therefore see the share price imputing a systemic/structural issue with the business model and target capital requirements and a low long term Indian Sandalwood heartwood/oil price.

We illustrate the aggregate cost on upcoming harvest remains relatively stable and well below the saleable price. Over the long term, this reduces to ~US$400/kg.

Figure 2: Aggregate cost of production (A$50k/ha development, A$50k/ha management, A$50k harvest/process/sell)

Source: Company Reports, Canaccord Genuity estimates

As a small external price verification, we see Sydney Essential Oil Company selling Indian Sandalwood at retail prices of A$14,157/kg (US$10,618/kg, http://www.seoc.com.au/product.asp?pID=6580&cID=231)

Over 90% of QIN’s historic revenue, and therefore earnings, were derived through the sale of new plantations to third parties (largely institutional investors) which acted as a funding model to build the business to scale and cover QIN’s fixed overheads. Going forward, the reliance on earnings/cash flows from establishment fees (~50% gross profit margins, FY18E A$55m gross profit) unwind and product revenues (>75% blended gross profit margins, FY18E $54m gross profit) becomes a larger proportion of group earnings. Planting for third parties is capital intensive and results in large swings in working capital, with an estimated annual cash cost of A$70m pa (~A$50k/ha, 1400ha pa, CGAu est.) with payment largely deferred. For this reason we believe a new supply agreement at similar prices is critical in the short term to remove the requirement of new capital (establishment fees) to fund the business which has been a key criticism of the business by investors in recent years.

2016A 2017E 2018E 2019E 2020E 2021E 2025E 2026E

Harvest area ha 104 107 71 91 154 163 1,020 1,140

Tree Yield kg/tree 9.7 10.1 11.0 8.2 6.7 8.7 18.0 18.3

Survival rate % 66% 49% 68% 62% 53% 49% 83% 83%

Trees at planting #/ha 463 463 463 503 541 555 505 505

Yield/hectare tn/ha 3.0 2.3 3.5 2.5 1.9 2.3 7.5 7.7

Heartwood produced tn 309 245 244 231 299 382 7693 8745

Oil extraction yield % 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7%

Oil Quantity produced tn 11.4 9.1 9.0 8.5 11.1 14.1 284.7 323.6

Oil yield/ha kg/ha 110 84 128 94 72 87 279 284

TFC cost over 15yrs A$'000 150 150 150 150 150 150 150 150

Marginal Cost A$/kg 1364 1779 1174 1604 2095 1728 537 529

Marginal Cost (Oil) US$/kg 1023 1334 881 1203 1571 1296 403 396

Marginal Cost (heartwood) US$/tn 27,640 36,053 23,798 32,519 42,464 35,019 10,892 10,714



http://www.seoc.com.au/product.asp?pID=6580&cID=231

Figure 3: CGAu est. of QIN earnings contribution by revenue source (gross profit from sale of product overtakes gross profit from plantation)

Source: Company reports, Canaccord Genuity estimates, ***indicative only

No large equity injection required needed if planting for third parties unwound and heartwood/oil pricing holds at current prices. The table below

illustrates QIN cash flow and P&L profile if the plantation business is unwound. The table incorporates sensitivity analysis at an oil price of US$4,500/kg, US$3,500/kg and US$2,500/kg. While not highly profitable, the business is self-funding and does not necessarily require external funding.

Our analysis illustrates the business will continue to operate without any need for external capital if the oil price holds above >US$2,500/kg assuming the put options on plantations sold in 2014 are not exercised. We note this analysis excludes the potential warrant exercise (A$72.2m cash to QIN) with a strike price of $1.28ps and maturity Jun-18. The company currently has $85m of contingent liabilities from the put options that fall due over FY18-FY20 (FY18 $34m, FY19/FY20 $51m) which has been excluded from this analysis.

We believe continuous plantations are required if the put options are exercised; however, this will likely become self-fulfilling if QIN successfully contracts a new heartwood partner in China. However, the company does hold a large asset base that can be monetized in the event of a liquidity squeeze.

The recent research report by the activist fund also targeted the marketing material by Jaderberg&Cie. We understand Jaderberg currently owns 500ha or

4% of QIN’s plantations, and has made investments in 2011, 2012 and 2013. Jaderberg is an independent fund based in Germany that invests in QIN’s plantations similar to GMO & Harvard. While its prospectus offers “ongoing annual disbursements of up to 10% of the amounts invested”, this is “subject to available liquidity” which could come as a secondary trade by a new investor or potentially

QIN.

While QIN has been actively purchasing later year plantations (to arbitrage its supply agreements of US$4,500/kg oil) we understand Jaderber&Cie does not own any put options that are reported as contingent liability on the balance sheet.

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A$m

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Revenue Gross Profit

A$83m

A$132m

Profit contribution from product revenues overtakes establishment fees if prices hold (new supply agreement required)

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% Gross Profit Split



Figure 4: Sensitivity to earnings if plantation business unwound (reduction of $110m revenue)

Source: Company reports, Canaccord Genuity estimates

Sensetivity at US$4,500/kgProfit & Loss ($m) 2015A 2016A 2017F 2018F 2019F 2020F 2021F Cash Revenue breakdown 2016A 2017F 2018F 2019F 2020F

Cash Revenues 147.7 171.8 178.1 111.3 115.5 114.4 124.3 Establ ishment Fees 103 83 0 0 0

Product Revenue 30 56 72 73 71

Cash EBITDA 57.5 62.2 45.3 9.1 14.5 13.9 12.6 Management Fees 29 35 36 36 37

D & A -8.6 -11.2 -12.9 -13.0 -12.3 -11.5 -10.9 Other Revenue 10 5 3 6 6

Cash EBIT 48.9 51.0 32.4 -3.9 2.3 2.3 1.7 Total Revenue 172 178 111 116 114

Net Interest Expense -19.0 -26.8 -22.9 -23.4 -23.8 -24.2 -24.7

NPBT 30.0 24.3 9.5 -27.4 -21.6 -21.9 -22.9 Assumptions 2016A 2017F 2018F 2019F 2020F

Tax expense -1.8 -7.6 -2.6 0.0 0.0 0.0 0.0 Saleable ISW Oil Price ($/kg) 3900 4290 4500 4500 4500

NPAT (Cash) 28.1 16.7 6.9 -27.4 -21.6 -21.9 -22.9 Hectares Planted (hec) 1703 1400 0 0 0

Non Cash Items 84.9 73.7 54.5 62.7 69.2 76.7 85.2 Hectares Harvest (hec) 104 109 71 91 154

NPAT (Reported) 113.0 90.4 61.4 35.3 47.6 54.8 62.2 Tonnes Heartwood Harvest (tn) 309 247 244 231 299

Oil Quantity Harvest (tn) 11.4 9.2 9.0 8.5 11.1

Cash Flow ($m) 2015A 2016A 2017F 2018F 2019F 2020F 2021F Yield (tn/hec) 3.0 2.3 3.5 2.5 1.9

Operating Cash EBITDA 57.5 62.2 45.3 9.1 14.5 13.9 12.6 AUDUSD 0.75 0.75 0.75 0.75 0.75

- Interest & Tax Pa id -22.1 -30.7 -25.5 -23.4 -23.8 -24.2 -24.7

+/- change in Work. Cap. -10.8 -7.9 -6.3 8.7 15.8 16.6 26.1

- other 0.0 -3.3 0.0 0.0 0.0 0.0 0.0

Operating Cashflow 24.6 20.2 13.5 -5.7 6.4 6.2 14.0

- Maintenance Capex -14.1 -16.1 -17.0 -17.3 -17.5 -17.5 -17.8

Free Cashflow 10.5 4.1 -3.5 -23.0 -11.0 -11.3 -3.8

- Growth Capex (Land/Develop.) -14.5 -30.9 -12.4 0.0 0.0 0.0 0.0

- Acquis i tion (buyback etc.) -42.2 -34.1 -25.0 0.0 0.0 0.0 0.0

- Ord Dividends -7.2 -7.5 -12.2 0.0 0.0 0.0 0.0

- Equity /other 2.5 65.7 69.6 0.0 0.0 0.0 0.0

Net Cashflow -51.0 -2.7 16.6 -23.0 -11.0 -11.3 -3.8

Cash at beginning of period 88.6 72.7 107.0 123.6 100.6 89.6 78.2

+/- borrowings / other 35.1 37.0 0.0 0.0 0.0 0.0 0.0

Cash at end of period 72.7 107.0 123.6 100.6 89.6 78.2 74.4




Cash EBITDA 57.5 62.2 45.3 9.1 6.1 2.3 -1.1 Management Fees 29 35 36 36 37

D & A -8.6 -11.2 -12.9 -13.0 -12.3 -11.5 -10.9 Other Revenue 10 5 3 6 6

Cash EBIT 48.9 51.0 32.4 -3.9 -6.2 -9.2 -12.0 Total Revenue 172 178 111 107 103









Operating Cash EBITDA 57.5 62.2 45.3 9.1 6.1 2.3 -1.1 AUDUSD 0.75 0.75 0.75 0.75 0.75



- other 0.0 -3.3 0.0 0.0 0.0 0.0 0.0

Operating Cashflow 24.6 20.2 13.5 -5.7 -2.2 -5.8 -0.4


Free Cashflow 10.5 4.1 -3.5 -23.0 -19.6 -23.3 -18.3



- Ord Dividends -7.2 -7.5 -12.2 0.0 0.0 0.0 0.0

- Equity /other 2.5 65.7 69.6 0.0 0.0 0.0 0.0

Net Cashflow -51.0 -2.7 16.6 -23.0 -19.6 -23.3 -18.3







Cash EBITDA 57.5 62.2 45.3 9.1 -2.4 -9.3 -14.9 Management Fees 29 35 36 36 37

D & A -8.6 -11.2 -12.9 -13.0 -12.3 -11.5 -10.9 Other Revenue 10 5 3 6 6

Cash EBIT 48.9 51.0 32.4 -3.9 -14.6 -20.8 -25.7 Total Revenue 172 178 111 99 91









Operating Cash EBITDA 57.5 62.2 45.3 9.1 -2.4 -9.3 -14.9 AUDUSD 0.75 0.75 0.75 0.75 0.75



- other 0.0 -3.3 0.0 0.0 0.0 0.0 0.0

Operating Cashflow 24.6 20.2 13.5 -5.7 -10.8 -17.8 -14.9


Free Cashflow 10.5 4.1 -3.5 -23.0 -28.2 -35.3 -32.7



- Ord Dividends -7.2 -7.5 -12.2 0.0 0.0 0.0 0.0

- Equity /other 2.5 65.7 69.6 0.0 0.0 0.0 0.0

Net Cashflow -51.0 -2.7 16.6 -23.0 -28.2 -35.3 -32.7




18.420.5

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QIN Revenue Profile

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Figure 5: CGAu earnings forecast

Source: Company reports, Canaccord Genuity estimates

TFS Corporation (TFC) Share Price 1.14$ Profit & Loss ($m) 2015A 2016A 2017F 2018F 2019F Valuation ratios 2015A 2016A 2017F 2018F 2019F

Cash Revenues 147.7 171.8 214.6 224.1 232.3 Cash EPS (cps) 7.4 4.1 7.6 8.3 9.0

EPS Growth (%) 41.5 -44.4 85.5 8.9 8.6

Cash EBITDA 57.5 62.2 81.9 86.0 90.7 Statutory EPS (cps) 29.7 22.3 19.9 22.5 24.7

D & A -8.6 -11.2 -12.9 -13.8 -14.9 P/E (x) - Cash 15.4 27.7 14.9 13.7 12.6

Cash EBIT 48.9 51.0 68.9 72.3 75.8 P/E (x) - Underlying 3.9 4.9 5.0 4.4 4.1

Net Interest Expense -19.0 -26.8 -22.4 -21.6 -20.7 NTA per share ($) 1.42 1.38 1.57 1.80 2.05

NPBT 30.0 24.3 46.6 50.7 55.1 BV per share ($) 1.48 1.93 2.25 2.47 2.71

Tax expense -1.8 -7.6 -12.8 -13.9 -15.1 P/BV (x) 0.77 0.59 0.51 0.46 0.42

NPAT (Cash) 28.1 16.7 33.8 36.8 39.9 Enterprise Value ($m) 599.1 607.9 593.0 593.6 581.1

Non Cash Items 84.9 73.7 54.5 62.7 69.2 EV / EBITDA (x) 10.4 9.8 7.2 6.9 6.4

NPAT (Reported) 113.0 90.4 88.2 99.5 109.1 EV / EBIT (x) 12.2 11.9 8.6 8.2 7.7

DPS (cps) 3.0 3.0 3.0 3.5 4.0

EBITDA Margin (%) 38.9% 36.2% 38.1% 38.4% 39.0% Dividend Yield (%) 2.6% 2.6% 2.6% 3.1% 3.5%

EBIT Margin (%) 33.1% 29.7% 32.1% 32.3% 32.6% Franking (%) 100% 100% 100% 100% 100%

NPAT Margin (%) 19.1% 9.7% 15.7% 16.4% 17.2% FCF PS - excl acq. (cps ) 6.4 9.0 11.9 18.1 19.7

P / FCFPS (x) 17.7 12.6 9.6 6.3 5.8

Cash Flow ($m) 2015A 2016A 2017F 2018F 2019F FCF yield (%) 2.4% 0.9% 5.3% 9.4% 11.8%

Operating Cash EBITDA 57.5 62.2 81.9 86.0 90.7 Dupont Analysis 2015A 2016A 2017F 2018F 2019F

- Interest & Tax Pa id -22.1 -30.7 -35.2 -35.5 -35.9 Net Profi t Margin 19.1% 9.7% 15.7% 16.4% 17.2%

+/- change in Work. Cap. -10.8 -7.9 -6.3 8.7 15.8 Asset Turnover 0.2 0.2 0.2 0.2 0.2

- other 0.0 -3.3 0.0 0.0 0.0 ROA (%) 4.2% 1.9% 3.4% 3.5% 3.5%

Operating Cashflow 24.6 20.2 40.3 59.2 70.6 Financia l Leverage 1.8 1.8 1.7 1.7 1.6

- Maintenance Capex -14.1 -16.1 -17.0 -17.7 -18.4 ROE (%) 7.7% 3.5% 5.9% 5.8% 5.7%

Free Cashflow 10.5 4.1 23.4 41.4 52.2 ROE (%) - Reported 19.7% 13.7% 10.9% 10.9% 10.8%

- Growth Capex (Land/Develop.) -14.5 -30.9 -22.9 -28.8 -24.1 Balance Sheet ratios 2015A 2016A 2017F 2018F 2019F

- Acquis i tion (buyback etc.) -42.2 -34.1 -25.0 0.0 0.0 Net Debt (cash) 156.7 165.5 150.5 151.2 138.6

- Ord Dividends -7.2 -7.5 -12.2 -13.3 -15.5 Price / NTA (x) 0.8 0.8 0.7 0.6 0.6

- Equity /other 2.5 65.7 69.6 0.0 0.0 EFPOWA (m) - incl . warrant 380.5 405.7 442.5 442.5 442.5

Net Cashflow -51.0 -2.7 33.0 -0.6 12.5 EFPOWA (m) - excl . warrant 327.0 388.1 388.1 388.1 388.1

Cash at beginning of period 88.6 72.7 107.0 140.0 139.3 Growth ratios 2015A 2016A 2017F 2018F 2019F

+/- borrowings / other 35.1 37.0 0.0 0.0 0.0 Sales revenue ($m) 21.8% 16.4% 24.9% 4.4% 3.7%

Cash at end of period 72.7 107.0 140.0 139.3 151.9 EBITDA ($m) 11.7% 8.2% 31.6% 5.1% 5.4%

EBIT ($m) 7.7% 4.3% 35.1% 4.9% 4.8%

Balance Sheet 2015A 2016A 2017F 2018F 2019F NPAT ($m) 23.0% -40.7% 102.4% 8.9% 8.6%

Cash 72.7 107.0 140.0 139.3 151.9 Assumptions 2015A 2016A 2017F 2018F 2019F

Inventories 23.7 25.0 30.0 30.0 30.0 Saleable ISW Oil Price ($/kg) 4198 3900 4290 4354 4441

Debtors 136.8 139.7 159.7 169.7 169.7 Hectares Planted (hec) 1539 1703 1400 1400 1400

PPE 144.6 161.7 190.4 225.0 254.4 Hectares Harvest (hec) 35 104 109 71 91

Intangibles 114.4 265.2 263.4 261.6 259.9 Tonnes Heartwood Harvest (tn) 31 309 247 244 231

Biologica l Assets - TFS Owned 504.5 623.2 689.1 760.1 843.1 Oil Quantity Harvest (tn) 1.1 11.4 9.2 9.0 8.5

Biologica l Assets - MIS Owned 120.0 148.1 177.7 213.2 255.8 Yield (tn/hec) 0.9 3.0 2.3 3.5 2.5

Other assets 56.7 22.2 22.2 22.2 22.2 AUDUSD 0.77 0.75 0.75 0.75 0.75

Total Assets 1173.3 1492.0 1672.4 1821.0 1986.9

Borrowings 229.3 272.5 290.5 290.5 290.5 Cash Revenue breakdown 2015A 2016A 2017F 2018F 2019F

Trade Creditors 55.1 49.4 49.4 49.4 49.4 Establ ishment Fees 87 103 119 109 110

Tax Liabi l i ties 155.4 206.3 213.5 240.4 270.1 Product Revenue 28 30 56 72 72

Other Liabi l i ties 159.0 216.6 246.2 281.7 324.3 Management Fees 23 29 35 40 45

Total Liabilities 598.8 744.8 799.6 862.0 934.3 Other Revenue 10 10 5 3 6

NET ASSETS 574.5 747.2 872.9 959.1 1052.6 Total Revenue 148 172 215 224 232

Board of Directors / Substantial Shareholders Valuation

Board of Directors Shareholding % Discounted Cash flow

Dalton Gooding - Chairman 0.1 0.0% Beta 1.7 WACC 11.9%

Gi l l ian Frankl in - Non Exec Director 0.2 0.1% Cost of equity 13.4% Discount period 27 years

John Groppol i - Non Exec Director Cost of debt 6.1% EFPOWA* 442.5

Jul ius Matthys - Interim CEO 3.3 1.2% Target Net debt/Net debt + equity 20% Valuation 3.38

Michael Kay - Non Exec Director 0.2 0.1% *EFPOWA incorporates conversion of 55.5m options at $1.28

Substantial Shareholders Shareholding % Description

Domenica Nominees (Frank Wi lson) 48.8 12.5%

Regal Funds Management 19.9 7.1%

Fidel i ty Investments 20.3 5.3%

TFS Corporation Limited (TFC) i s an owner and manager of Indian sandalwood plantations in

northern Austra l ia . TFC is involved the management and operation of forestry plantations ,

cul tivation and sa le of agricul ture produce, the provis ion of finance, and the production and

sa le of Sandalwood Oi l and related products . TFC has four divis ions namely plantation

management, finance, sandalwood products and agricul ture.



Appendix: Important DisclosuresAnalyst CertificationEach authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) therecommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent andobjective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoringanalyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to thespecific recommendations or views expressed by the authoring analyst in the research.Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons ofCanaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communicationswith a subject company, public appearances and trading securities held by a research analyst account.Sector CoverageIndividuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoringanalysts of the report.

Investment RecommendationDate and time of first dissemination: May 01, 2017, 20:08 ETDate and time of production: May 01, 2017, 20:08 ETTarget Price / Valuation Methodology:Quintis Ltd - QINWe currently value TFC using a 27-year DCF methodology (no terminal value) with a WACC of 10.8%.Risks to achieving Target Price / Valuation:Quintis Ltd - QINThe key investment risks for TFS include: Biological risk -- Biological assets are prone to weather, pests, disease and fire risk. Thecompany has operated for fourteen years without fire damage to its plantations. The plantations are located inland to prevent impactfrom cyclones and situated in tropical areas of northern Australia that are not prone to flooding. Long-term duration investment --Sandalwood trees take over fifteen years to mature, and should be considered by long-term investors. Key man risk -- Over the pastdecade, the company has invested heavily in R&D programs and personnel. In our view, a loss of a number of key people should beperceived by shareholders as a negative. Commodity price risk -- TFS plans to sell a significant amount of Indian Sandalwood heartwoodoil into the export market. The quantum of end market demand remains largely unknown leading to price assumptions that could beincorrect. Currency risk -- The company converted US$150m debt at a currency level of 1.0941. A continued devaluation of the AUDwould see this liability increase. The company plans to sell its heartwood in USD, providing a natural hedge to the liability.

Distribution of Ratings:Global Stock Ratings (as of 05/01/17)Rating Coverage Universe IB Clients

# % %Buy 570 60.25% 39.65%Hold 279 29.49% 18.28%Sell 27 2.85% 11.11%Speculative Buy 70 7.40% 68.57%

946* 100.0%*Total includes stocks that are Under Review

Canaccord Genuity Ratings SystemBUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.

HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.

SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.

NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or therelevant issuer.Risk Qualifier



SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in thestock may result in material loss.

12-Month Recommendation History (as of date same as the Global Stock Ratings table)A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month periodmay be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

Required Company-Specific Disclosures (as of date of this publication)Quintis Ltd currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. During this period,Canaccord Genuity or its affiliated companies provided investment banking services to Quintis Ltd.In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services fromQuintis Ltd .In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-manager ofa public offering of securities of Quintis Ltd or any publicly disclosed offer of securities of Quintis Ltd or in any related derivatives.Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Bankingservices from Quintis Ltd in the next three months.The primary analyst, a member of primary analyst's household, or any individual directly involved in the preparation of this research, hasa long position in the shares or derivatives, or has any other financial interest in Quintis Ltd, the value of which increases as the value ofthe underlying equity increases.

Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17

AUD3.50

AUD3.00

AUD2.50

AUD2.00

AUD1.50

AUD1.00

Quintis Ltd Rating History as of 04/27/2017Quintis Ltd Rating History as of 04/27/2017

Closing Price Target Price

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

B:AUD2.9705/22/14

B:AUD3.2007/01/14

B:AUD3.3308/19/14

B:AUD3.4409/02/14

B:AUD2.8401/19/15

B:AUD2.8403/30/15

B:AUD2.9006/18/15

B:AUD3.0209/01/15

B:AUD3.2411/26/15

B:AUD3.2304/13/16

B:AUD3.3608/28/16

B:AUD3.3802/27/17

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http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx

The authoring analysts who are responsible for the preparation of this research have received (or will receive) compensation based upon(among other factors) the Investment Banking revenues and general profits of Canaccord Genuity. However, such authoring analystshave not received, and will not receive, compensation that is directly based upon or linked to one or more specific Investment Bankingactivities, or to recommendations contained in the research.Some regulators require that a firm must establish, implement and make available a policy for managing conflicts of interest arising asa result of publication or distribution of research. This research has been prepared in accordance with Canaccord Genuity’s policy onmanaging conflicts of interest, and information barriers or firewalls have been used where appropriate. Canaccord Genuity’s policy isavailable upon request.The information contained in this research has been compiled by Canaccord Genuity from sources believed to be reliable, but (with theexception of the information about Canaccord Genuity) no representation or warranty, express or implied, is made by Canaccord Genuity,its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness. Canaccord Genuity has notindependently verified the facts, assumptions, and estimates contained herein. 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Canaccord Genuity Inc., a US registered broker-dealer, accepts responsibility for this research and its dissemination in the United States.This research is intended for distribution in the United States only to certain US institutional investors. US clients wishing to effecttransactions in any designated investment discussed should do so through a qualified salesperson of Canaccord Genuity Inc. Analystsemployed outside the US, as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. Theseanalysts may not be associated persons of Canaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analystaccount.For United Kingdom and European Residents:This research is distributed in the United Kingdom and elsewhere Europe, as third party research by Canaccord Genuity Limited,which is authorized and regulated by the Financial Conduct Authority. This research is for distribution only to persons who are EligibleCounterparties or Professional Clients only and is exempt from the general restrictions in section 21 of the Financial Services andMarkets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is beingdistributed in the United Kingdom only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) (High NetWorth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005(as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. This material is not fordistribution in the United Kingdom or elsewhere in Europe to retail clients, as defined under the rules of the Financial Conduct Authority.For Jersey, Guernsey and Isle of Man Residents:This research is sent to you by Canaccord Genuity Wealth (International) Limited (CGWI) for information purposes and is not to beconstrued as a solicitation or an offer to purchase or sell investments or related financial instruments. This research has been producedby an affiliate of CGWI for circulation to its institutional clients and also CGWI. Its contents have been approved by CGWI and we areproviding it to you on the basis that we believe it to be of interest to you. This statement should be read in conjunction with your clientagreement, CGWI's current terms of business and the other disclosures and disclaimers contained within this research. If you are in anydoubt, you should consult your financial adviser.CGWI is licensed and regulated by the Guernsey Financial Services Commission, the Jersey Financial Services Commission and the Isleof Man Financial Supervision Commission. CGWI is registered in Guernsey and is a wholly owned subsidiary of Canaccord Genuity GroupInc.For Australian Residents:This research is distributed in Australia by Canaccord Genuity (Australia) Limited ABN 19 075 071 466 holder of AFS Licence No234666. To the extent that this research contains any advice, this is limited to general advice only. Recipients should take into accounttheir own personal circumstances before making an investment decision. Clients wishing to effect any transactions in any financialproducts discussed in the research should do so through a qualified representative of Canaccord Genuity (Australia) Limited. CanaccordGenuity Wealth Management is a division of Canaccord Genuity (Australia) Limited.For Hong Kong Residents:This research is distributed in Hong Kong by Canaccord Genuity (Hong Kong) Limited which is licensed by the Securities and FuturesCommission. This research is only intended for persons who fall within the definition of professional investor as defined in the Securitiesand Futures Ordinance. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. Recipients ofthis report can contact Canaccord Genuity (Hong Kong) Limited. (Contact Tel: +852 3919 2561) in respect of any matters arising from, orin connection with, this research.Additional information is available on request.Copyright © Canaccord Genuity Corp. 2017 – Member IIROC/Canadian Investor Protection Fund

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speculative buy (from buy) a lot of moving parts; revise ... · pdf fileeps adj&dil (auc)...

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