Market Update & Important Indicators
U.S. stocks gave up early gains to trade down slightly on Monday and the Dow Jones lost 42 points, or 0.2%, to 18,038. Recent strength in the tech sector had spilled over into the broader market and helped propel the S&P to a fresh record Friday, although that petered out Monday with the S&P 500 dropping 9 points, or 0.4%, to 2,109.
European stocks rebounded and Greek government bonds surged Monday after Greece reshuffled its team for bailout negotiations with creditors. Markets had opened lower, after Friday's summit of eurozone ministers ended in deadlock, but picked up in the afternoon while Greek bonds rallied. The Stoxx Europe 600 closed 1.0% higher, building on the previous week's gains, and Greece's Athex Composite index surged 4.4%, led by bank stocks. Germany's DAX shrugged off small early losses to climb 1.9%, France's CAC 40 rose 1.3%, while the U.K.'s FTSE 100 advanced 0.5%.
Asian markets rose Monday, with Shanghai shares jumping on the latest rhetoric from Beijing on reform. The Shanghai Composite Index finished 3.0% higher at 4,527, after local reports that China is planning a new wave of mergers in the state sector, reducing the number of companies owned by the central government by nearly two-thirds. Monday's rise was the second-biggest of the year, and continued seven straight weeks of gains. The effects were also seen in Hong Kong, where the Hang Seng Index gained 1.3% to 28,434.
Iron ore extended its run overnight, with 62% Fines climbing over 2% to $59.09/t. This was the 8th straight positive session after the bulk material had fallen as low as $46/t earlier this month. Base metals also gained across the board, with copper and nickel climbing 0.6% and 2.7% respectively.
In precious metals gold jumped back above $1,200, picking up 1.8% to currently trade at $1,202/oz. Crude oil dipped overnight however, with Brent off 1.0% at $64.65/bbl.
Thought for the day
TFS Corporation (TFC) – Well-oiled machine
Market Cap $546m
Recommendation BUY
Current Price $1.67
Valuation $2.65
We continue to find the investment case highly appealing. We expect the vertically integrated business model to allow TFC to take full advantage of very attractive, and improving, demand and supply dynamics for Indian Sandalwood Oil (ISO).
To recap, TFC’s “soil to oil” model starts with the identification of suitable locations for Indian Sandalwood plantations, progresses through the establishment and ongoing management of the trees, and finishes with the processing, marketing and distribution of the valuable heartwood and oil.
Deep and enduring markets
Focusing on market demand, Sandalwood heartwood and oil has been highly valued for its unique fragrance for centuries. We have proof in our own backyard: Australian Sandalwood has been exported from WA since the 1840’s and was at one time the State’s primary export earner.
However, due to oil quality, the Indian Sandalwood variety is far more valuable than the Australian Sandalwood variety. It needs a very different climate and is the variety that has been planted exclusively by TFC on its plantations across northern Australia. Indian Sandalwood has applications across the globe, with the heartwood being used for fine furniture, carving, religious ceremonies and cremation in Asian markets. The oil is used in the beauty, fragrance and pharmaceutical industries in Western markets.
Under-appreciated potential in pharma
In February 2014, TFC signed a licensing and supply agreement with Galderma, a subsidiary of Nestlé, and a global leader in dermatology. The deal established a long-term supply agreement for TFC’s pharma-grade oil via TFC’s JV Company, Santalis Pharmaceuticals.
We believe that the potential pharma demand is significant, broadening the potential of already deep markets. In December 2014 Galderma launched its new Benzac Acne Solutions range and has followed this up with a marketing campaign that, importantly, highlights ISO as a key ingredient. The Benzac website (www.benzac.com), product advertisements and packaging (see below) all prominently highlight the importance of the ISO ingredient.
We believe that the Galderma agreement and Benzac product launch has been under-appreciated. The fact that Galderma has tied its product closely to TFC’s ISO strongly endorses the quality of the oil, it provides an initial price point of US$4,500/kg (it was less than US$500/kg when TFC planted its first plantations in 1999) and opens up a potentially large market. Bear in mind that pharma applications extend beyond acne, as ISO’s anti-inflammatory, anti-microbial and anti-viral properties could have numerous other potentially beneficial dermatological applications.
Strong investment case
Last calendar year was pivotal. First trees were harvested, first oil was produced, and TFC signed the important agreement with Galderma. The subsequent launch of the new Benzac product range for acne treatment opens up a very large potential pharma market for ISO in addition to traditional markets. The improved visibility has flowed through to demand for the plantation investment product, and recently to demand for the Company’s debt. It should be true for TFC’s equity as well, particularly as an exposure to an appreciating US$ is an added bonus.
Recent Contacts & Presentations
Dacian (DCN), MZI Resources (MZI), Mobile Embrace (MBE), Saracen (SAR), Fertoz (FTZ), Atrum (ATU), Doray (DRM), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), Migme (MIG), Vmoto (VMT), Pioneer Credit (PNC), Minemakers (MAK), High Peak Royalties (HPR), Leaf Resources (LER), Austin Engineering (ANG), Ausdrill (ASL), Matrix (MCE), Austal (ASB), MMA Offshore (MRM), CTI Logistics (CLX), 99 Wuxian (NNW)
Important Disclosures
Argonaut acts as Corporate Adviser to TFS Corporation Limited (TFC) and may receive fees commensurate with this service. Argonaut was engaged on normal commercial terms to assist TFC in relation to its Beyond Carbon business.
Please read Argonaut's Important Disclaimers & disclosures
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