Rubicon — Well-positioned going into H2

ArborGen Holdings (NZX: ARB)

Last close As at 18/04/2024

NZD0.17

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Market capitalisation

NZD88m

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Research: Industrials

Rubicon — Well-positioned going into H2

Rubicon’s H1 performance contained typical seasonal trading features ahead of the more important H2 trading period and our earnings estimates are unchanged. We are encouraged to see a number of positive commercial steps being taken in each of the main countries, which will support future aspirations. Our earnings estimates are unchanged as is our previous DCF valuation analysis which indicated a NZ$0.74 per share valuation.

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Industrials

Rubicon

Well-positioned going into H2

H119 results

Basic materials

20 December 2018

Price

NZ$0.23

Market cap

NZ$112m

NZ$/US$0.68

Net debt (US$m) at end-September 2018

24

Shares in issue

487.9m

Free float

53%

Code

RBC

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.2)

(13.5)

15.4

Rel (local)

(7.5)

(6.6)

14.5

52-week high/low

NZ$0.3

NZ$0.2

Business description

Rubicon is an NZX-listed investment company whose ArborGen subsidiary is the world’s largest integrated developer, commercial manufacturer and supplier of advanced forestry seedlings with operations in the US, Brazil and Australasia.

Next events

FY19 year end

March

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Rubicon is a research client of Edison Investment Research Limited

Rubicon’s H1 performance contained typical seasonal trading features ahead of the more important H2 trading period and our earnings estimates are unchanged. We are encouraged to see a number of positive commercial steps being taken in each of the main countries, which will support future aspirations. Our earnings estimates are unchanged as is our previous DCF valuation analysis which indicated a NZ$0.74 per share valuation.

Year
end

Revenue (US$m)

EBITDA – US GAAP (US$m)

PBT*
(US$m)

EPS*
(c)

P/E
(x)

EV/EBITDA

(x)

03/18**

35

6

4

1.2

12.7

14.4

03/19e

50

5

5

1.1

14.7

18.7

03/20e

59

9

10

2.0

7.8

10.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **Six-month trading period only.

First half reflects seasonal trading pattern

Rubicon’s maiden first-half report (to September) as a focused, advanced tree seedling development and supply business contained good updates on operational and commercial initiatives in the seasonally quieter section of the year. For the record, the company generated revenue of US$10m and a US GAAP EBITDA loss of US$5m (before restructuring costs of US$2m) in the period. The underlying cash outflow performance was consistent with the seasonal trading pattern, in our view, and the final deferred consideration payment of US$10m for ArborGen was also in line with previous guidance. Net debt at the period end stood at US$24m.

Improving ArborGen financial returns

Notwithstanding some disruption from US weather events around the end of H1, Rubicon should be able to clearly demonstrate its business model characteristics in H2 through notably stronger revenue, EBITDA and positive cash flows. Our earnings expectations are unchanged for all three forecast years, which include a group US GAAP US$5m EBITDA expectation for FY19 (i.e US$7m ArborGen EBITDA less US$2m Rubicon public company costs). After a period of corporate and management change, the stage is set for ArborGen to convert its market presence and proposition to forestry plantation owners into improving financial returns for shareholders. With a number of new commercial agreements announced in the past 12 months, business momentum appears to be positive.

Valuation: Up year-to-date, but well off earlier highs

Rubicon’s share price has risen by c 18% ytd but is over 20% off from the 29.5c high seen in July. At this stage, we see no reason to change our initial DCF valuation approach, which gave a core gross equity value for Rubicon equal to NZ$0.74 per share, before adjusting for outstanding warrants and options. On our estimates, the company’s market valuation compresses from a P/E of 14.7x and EV/EBITDA of 18.7x for the current year, to 6.2x and 7.5x, respectively, by FY21.

H119 results overview

We do not have a true comparator period for Rubicon’s H119 results, given the change in corporate structure and change of year-end. ArborGen is Rubicon’s sole operating company now and during the seasonally quieter first half of its financial year, the Rubicon Group generated a US GAAP EBITDA loss of US$5m (before restructuring costs). Further actions were also taken to develop ArborGen commercially.

No geographical sales split was provided at the interim stage, but for seasonal reasons non-US sales were the bulk of the H1 total. Our regional comments are as follows:

US: Weather events around the half-year end

The primary tree seedling planting period in the US south-eastern region takes place during the second half of ArborGen’s trading year. Customer shipments are second-half-weighted but towards the end of H1 they may have been affected to some extent by Hurricane Florence (category 2 at the point of landfall, second week of September) and Michael at the beginning of H2 (category 4, third week of October). The company’s US GAAP guidance for ArborGen for the year (‘approaching US$7m’) is unchanged, which suggests that cost reduction actions taken will compensate for any sales shortfall. ArborGen’s own seedling nurseries were unaffected but one (of nine) seed orchards did sustain some damage. The extent of this (ie seed production volumes for 2019 planting to produce seedlings for FY21) is still to be disclosed; for modelling purposes, we have effectively assumed that our existing seedling volume expectations will be met from a combination of the ongoing ArborGen facilities and its two new nursery management agreements (Taylor Nursery in Trenton SC, signed in February and, more recently, Texmark Timber Treasury’s nurseries and seed orchards in Texas, signed in November). Under these agreements, ArborGen leases existing operations (for 10 years and five years, respectively, the latter with options to transfer ownership) to effectively increase seedling capacity by 60m seedlings without significant upfront capital investment. We will monitor the production from these two new arrangements (the latter of which is not included in our forecasts) and balance this against any short-term orchard impact as more details emerge, if necessary.

Brazil: Moving forward with eucalyptus licensing

There were no specific updates regarding Brazilian operations in the first half, although we note the separate 22 November announcement regarding the commercialisation of Gerdau Aços Longos SA’s eucalyptus clones. ArborGen has exclusive development rights here and this adds to the company’s existing licensing arrangements with International Paper do Brazil and local seedling portfolio offering for this species. Initial sales may occur towards the end of FY20 and start to build in FY21 in a local market that is estimated by management to be c 700m seedlings per annum. ArborGen currently services less than 10% of this total volume or c 15–20% of the non-captive addressable market.

ANZ: National planting programme underway

In the context of ArborGen’s c 16m annual seedling sales in New Zealand, an agreement with Crown Forestry (which manages the New Zealand government’s commercial forestry assets) to supply an additional c 12m in FY20 is significant new business and this is already factored into our existing estimates. Given that the government has a 10-year/one billion tree-planting programme, we consider that there is a good likelihood of follow-on supply agreements, but our model does not currently assume this.

Operational cash control, M&A flows end

Payment of the final US$10m deferred consideration for acquiring ArborGen minorities from the former partner shareholders was the dominant cash flow item in H119 and explained a substantial portion of the US$14m increase in net debt in the period to US$24m at the end of September.

At the operational level, Rubicon saw a US$3m trading cash outflow comprising the profit performance outlined earlier and a US$1m working capital inflow. Given the seasonal inventory build at the half-year stage (and US$6m absorption for the period), we consider this to be a well-managed outturn. The interest cash payment of US$1m was in line with the P&L and no cash tax was paid during H1. After taking into account disposal proceeds, net tangible fixed asset investment was also zero, although US$2m R&D costs were capitalised and flowed out as cash. Lastly, the receipt of US$2m as the final payment for non-core business assets sold in the prior year completes the cash-flow picture for H1.

Cash-flow outlook: now that M&A effects have worked through Rubicon’s reporting cycle, this gives a clearer picture of the company’s financial position. The company’s financing structure comprises a US$12m asset-backed term loan with 18 years to run and a newly increased and extended US$17m revolving credit facility to August 2020. So, with net bank debt at the end of H1 of US$12m and our expectation of a c US$5m cash inflow in H2, Rubicon appears to have a solid funding base. Our model includes improving operating cash-flow performances in future periods and net debt trending down currently.

Aiming to take share in growing economies

We have trimmed our FY19 revenue and gross profit projections to take account of the potential impacts from the US weather events described earlier, although we expect this to be compensated for by cost reduction activity elsewhere. Consequently, our group US GAAP US$5m EBITDA positive expectation for the year is unchanged. This is in line with company guidance for ArborGen to generate US$7m EBITDA less our assumed US$2m of Rubicon public company costs for the year. If some US planting deferral does happen, there is an argument for some catch-up activity in FY20; at this stage we have not assumed that this is the case and have made no other changes to our estimates.

The backdrop is for growth to continue in all three of ArborGen’s main country economies, although perhaps at a slower rate than in the current year in the US and New Zealand, where monetary tightening is occurring. The bigger picture is, of course, for ArborGen to take market share in the US market through the delivery of advanced seedlings that bring productivity benefits to commercial forestry owners.

Exhibit 1: Financial summary

US$m

2017R

2018

2019e

2020e

2021e

March (from 2018 onwards)

15m to Sep

6m to March

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

6

35

50

59

65

Cost of Sales

 

 

(4)

(19)

(29)

(34)

(38)

Gross Profit

 

 

2

16

20

25

27

EBITDA - US GAAP

 

 

(6)

6

5

9

12

EBITDA - NZ IFRS

 

 

(1)

6

10

14

17

Operating Profit (before GW and except.)

 

 

(2)

5

7

11

14

Intangible Amortisation - internal

 

 

0

0

0

0

0

Exceptionals & Amortisation - external

 

 

(1)

(4)

(8)

(6)

(6)

Associate

 

 

3

0

0

0

0

Operating Profit

 

 

0

1

(1)

6

8

Net Interest

 

 

(2)

(1)

(2)

(2)

(1)

Profit Before Tax (norm)

 

 

(1)

4

5

10

12

Profit Before Tax (FRS 3)

 

 

(2)

0

(2)

4

7

Tax

 

 

0

2

0

0

0

Minorities

 

 

0

0

0

0

0

Discontinued

 

 

(4)

0

0

0

0

Profit After Tax (norm)

 

 

(1)

6

5

10

12

Profit After Tax (FRS 3)

 

 

(6)

2

(2)

4

7

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

425.0

487.9

487.9

487.9

487.9

EPS - normalised (US c)

 

 

(0.2)

1.2

1.1

2.0

2.5

EPS - FRS 3 (US c)

 

 

(1.4)

0.4

(0.5)

0.9

1.4

Dividend per share (US c)

 

 

0.0

0.0

0.0

0.0

0.0

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

33.3

45.7

40.5

41.6

42.2

EBITDA Margin (%)

 

 

-16.7

17.1

20.4

24.2

25.6

Operating Margin (before GW and except.) (%)

 

 

-33.3

14.3

14.3

19.1

21.0

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Fixed Assets

 

 

187

151

147

145

142

Intangible Assets

 

 

125

107

106

106

105

Tangible Assets

 

 

62

44

41

39

37

Investments

 

 

0

0

0

0

0

Current Assets

 

 

81

64

51

59

69

Stocks

 

 

41

25

27

32

34

Debtors

 

 

9

10

10

12

13

Cash

 

 

31

29

14

16

22

Current Liabilities

 

 

(57)

(36)

(13)

(14)

(14)

Creditors

 

 

(38)

(20)

(13)

(14)

(14)

Short term borrowings

 

 

(19)

(16)

0

0

0

Long Term Liabilities

 

 

(51)

(27)

(37)

(37)

(37)

Long term borrowings

 

 

(45)

(23)

(33)

(33)

(33)

Other long term liabilities

 

 

(6)

(4)

(4)

(4)

(4)

Net Assets

 

 

160

152

149

153

159

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

(3)

4

6

9

13

Net Interest

 

 

(4)

(2)

(2)

(2)

(1)

Tax

 

 

0

0

0

0

0

Capex

 

 

(5)

(3)

(5)

(6)

(6)

Acquisitions/disposals

 

 

66

2

(8)

0

0

Financing

 

 

12

(1)

0

0

0

Dividends

 

 

0

0

0

0

0

Net Cash Flow

 

 

66

0

(9)

2

6

Opening net debt/(cash)

 

 

65

33

10

19

17

HP finance leases initiated

 

 

0

0

0

0

0

Other

 

 

(34)

23

0

0

0

Closing net debt/(cash)

 

 

33

10

19

17

11

Source: Rubicon, Edison Investment Research. Note: 2017R was restated to show discontinued operations separately. Significant other items in 2017R and 2018 cash flow relate to M&A activity associated with the disposed Tenon operations.

General disclaimer and copyright

This report has been commissioned by Rubicon and prepared and issued by Edison, in consideration of a fee payable by Rubicon. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New Zealand

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Frankfurt +49 (0)69 78 8076 960

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Rubicon and prepared and issued by Edison, in consideration of a fee payable by Rubicon. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Low & Bonar — Re-set dividend expectations, targeting recovery

Improving operating and financial performance and lower net debt are key management objectives. FY18 results should provide some evidence of progress here, although our revised estimates now contain lower margin and dividend expectations in all three forecast years. Balance sheet clarity and margin recovery will be key share price catalysts, in our view.

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