ARB-ArborGen Holdings Ltd

[LoungeLizzard]

I'm with Thistle and Hunter and reckon there's plenty of upside compared to downside from here, especially when you model out the effects of increasing MCP supply that's now coming into inventory. The intentions of the ANZ sale seems like a clear focus on the USA and a listing there to me, which is a nice bonus.

It's a bit messy but I've put my thesis into a write up which may be of interest for those hopeful ARB followers: https://fundamentalgoob.com/2021/11/...rgen-holdings/

I've now joined those hopeful holders but always happy to hear why I might be wrong.

Excellent summary. Thanks!

[ralph]

Yes thanks also goob. I am even more gutted now

[Thistle72]

I'm with Thistle and Hunter and reckon there's plenty of upside compared to downside from here, especially when you model out the effects of increasing MCP supply that's now coming into inventory. The intentions of the ANZ sale seems like a clear focus on the USA and a listing there to me, which is a nice bonus.

It's a bit messy but I've put my thesis into a write up which may be of interest for those hopeful ARB followers: https://fundamentalgoob.com/2021/11/...rgen-holdings/

I've now joined those hopeful holders but always happy to hear why I might be wrong.

Great job Goob - you've modeled the MCP inflection really nicely and my back of the envelope calculations are similar.

I think of the ArborGen business as sort of like a software subscription. If ArborGen's seedlings have better growth traits than the competition (all signs seem to indicate they do), then it has a captive base of forestry customers who will continue to upgrade their seedling purchases as the company ramps its technology. The marginal additional cost of growing an MCP, Varietal or Transgenic seedling is small, so what we should see is margins meaningfully increase even if the number of seedlings sold is flat, as you have projected. R&D needs to continue to make sure the value-add is there.

I also see upside in ARB's "Advanced Genetics Platform" that can be applied to more forestry products in future. The sale of carbon credits from forestry holdings is a new revenue source for landowners, and they are incentivized to plant tree species that will grow fast and capture the most carbon. Too early to model this into financial projections, but it's out there as a growth opportunity.

The risks are real. ArborGen has been a perennial disappointer in one way or another, and governance remains a concern. I would be very disappointed if ARB were sold out from under us, which is a possibility given that the majority of shares are in the hands of a investors (Knott and Libra) who may have limits on their patience.

[Maxtrade]

Great job Goob - you've modeled the MCP inflection really nicely and my back of the envelope calculations are similar.

I think of the ArborGen business as sort of like a software subscription. If ArborGen's seedlings have better growth traits than the competition (all signs seem to indicate they do), then it has a captive base of forestry customers who will continue to upgrade their seedling purchases as the company ramps its technology. The marginal additional cost of growing an MCP, Varietal or Transgenic seedling is small, so what we should see is margins meaningfully increase even if the number of seedlings sold is flat, as you have projected. R&D needs to continue to make sure the value-add is there.

I also see upside in ARB's "Advanced Genetics Platform" that can be applied to more forestry products in future. The sale of carbon credits from forestry holdings is a new revenue source for landowners, and they are incentivized to plant tree species that will grow fast and capture the most carbon. Too early to model this into financial projections, but it's out there as a growth opportunity.

The risks are real. ArborGen has been a perennial disappointer in one way or another, and governance remains a concern. I would be very disappointed if ARB were sold out from under us, which is a possibility given that the majority of shares are in the hands of a investors (Knott and Libra) who may have limits on their patience.

Thanks for the detailed post Goob. Spot on. Either way looking like substantial returns on the upside higher than current SP 0.27.
Solid half year guidance report. Confirming direction and where things are headed. Surprised to see that relatively large seller sitting there hasn't removed or upped their sale price to mid 0.3's at least with this outlook. Guess they must need their funds. Seems to be creating a mental block there currently holding the SP back from leaving the station for a rally north. I would say it's fair to say as soon as that seller clears out the way SP will follow a steady uptrend to follow. Then likely see several 20% spikes with any further updates with US progress (similar to what PEB has experienced and shown over last 12months).

Definitely want to be holding should any US listing subsequently be announced. If not holding prior will miss an easy 20% plus bounce there.

Thanks guys for your input and info.

[TheHunter]

I'm with Thistle and Hunter and reckon there's plenty of upside compared to downside from here, especially when you model out the effects of increasing MCP supply that's now coming into inventory. The intentions of the ANZ sale seems like a clear focus on the USA and a listing there to me, which is a nice bonus.

It's a bit messy but I've put my thesis into a write up which may be of interest for those hopeful ARB followers: https://fundamentalgoob.com/2021/11/...rgen-holdings/

I've now joined those hopeful holders but always happy to hear why I might be wrong.

Hey Goob, nice summary and thanks for sharing. Completely agree with the overall premise and direction and very happy to see someone else modelling MCP numbers as well.

However, I don't think your modelling is quite right; between 2024 and 2026 we see an increase of MCP from 50% to 70% of total volume, yet you are also showing a decreasing GM %. When MCP margins are ~8x higher than OP, GM % should be trending materially up, reflecting the much more favorable product mix which is the core premise of the ARB growth story.

Your mistake is taking the MCP margin assumption @ 7-9x OP and applying this to prices, instead of margin. You've also used a 15% CAGR for COGS which again, does not reflect the proper margin assumption.

Not to worry tho, you'll be even more impressed with the numbers once you re-calculate based on MCP margins.

All the best.

[Thistle72]

Very disappointing the half-year results do not include any update on the strategic review. Shareholders deserve at least some idea of when this will be complete. What is taking so long?

[Goob]

Thanks for that feedback Hunter. Take the 15% CAGR growth in cost of sales with a grain of salt, I had only really done that because of my natural skepiticism. We know that given the difference in margin, cost of sales will only really increase slightly no matter the product mix. But if I applied only incremental increases in cost of sales (which btw I think is realistic) combined with the full movement to 70% MCP product mix the gross profit really starts to blow out ($approaching $60m in 2026). If I reduce down my R&D assumption as well, EBITDA is looking like $36m in the US business by 2026, which given the past performance I can't confidently say is likely considering it's currently $6m. Adding margins of safety, maybe it's a downfall that I'm too conservative. Time will tell.

I know my approach with selling price isn't perfect but it's where I could get the numbers and it matches relatively well. Haven't had the chance to look over the recent result just yet.

I would be interested to hear where you see gross profits increasing to over the next five years?

My main concerns for all of this are actually getting customers to move to MCP which looks somewhat difficult (i.e. ANZ in 2020 only sold 50% of seeds MCP) and getting customers to move to MCP at today's prices in the future. But they are pretty confident about their MCP market share in the US so potentially they do have lots of pricing power.

[biker]

Share price a bit soft at the moment with plenty on offer. Wouldn’t surprise me if Hugh Fletcher is selling down now that he is involved with the purchase of the Australasian division.
May be a weak share price for a while.

[TheHunter]

Thanks for that feedback Hunter. Take the 15% CAGR growth in cost of sales with a grain of salt, I had only really done that because of my natural skepiticism. We know that given the difference in margin, cost of sales will only really increase slightly no matter the product mix. But if I applied only incremental increases in cost of sales (which btw I think is realistic) combined with the full movement to 70% MCP product mix the gross profit really starts to blow out ($approaching $60m in 2026). If I reduce down my R&D assumption as well, EBITDA is looking like $36m in the US business by 2026, which given the past performance I can't confidently say is likely considering it's currently $6m. Adding margins of safety, maybe it's a downfall that I'm too conservative. Time will tell.

I know my approach with selling price isn't perfect but it's where I could get the numbers and it matches relatively well. Haven't had the chance to look over the recent result just yet.

I would be interested to hear where you see gross profits increasing to over the next five years?

My main concerns for all of this are actually getting customers to move to MCP which looks somewhat difficult (i.e. ANZ in 2020 only sold 50% of seeds MCP) and getting customers to move to MCP at today's prices in the future. But they are pretty confident about their MCP market share in the US so potentially they do have lots of pricing power.

I found the opposite - I could only find the numbers and back solve at a GM level. If you do it via price you have to make some big assumptions which can drive some big fluctuations as you've seen by adjusting the CAGR rate you've used.

I've PM'd you and look forward to discussing the numbers

[Sgt Pepper]

Could some kind person walk me through the process of delisting a NZ company and migrating to another sharemarket. What are the implications for shareholders?