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[finalx]

As promised to Miles, making my maiden stock tip.

Stock - Biofutures International Plc (Public, LON:BIP)

To quote google

"Biofutures International Plc is an investing company focused on investing in or acquiring projects or companies in the energy or utility sectors and their infrastructures. The Company, along with its subsidiaries, is involved in refining palm oil. Through its wholly owned subsidiary Zurex Corporation Sdn. Bhd. (Zurex), it is engaged in building a palm oil refinery plant. As of December 31, 2008, the Company was organized into two main business segments: development and administration of investments, and planning and construction of palm oil refining plant and related activities."

Share price currently around 3.75 pence per share, see ticker BIP on LSE or BIP.GB for PLUS.

It's a palm oil play. Why is this interesting? As we know crude oil we use for petrol, etc has bounced dramatically since beginning of the year from the low of $30s to $70s and often plays on these are either very risky involving several stages of intense capital expenditure and with no guarantees of findings and little downside protection (drilling and surveying). However the upside is good with a continuing revenue stream, provide defensive support for dividends and higher valuation on share price, which is why people still do speculative play on oil drills and bank their money on the likes of BP/Shell. Look at the graph below and see something familiar?





It follows the rocket rise and fall of the normal crude oil prices because as normal crude oil gets expensive, palm oil gets used as substitute in some places. In other times, palm oil has both cosmetic/chemical (face creams, etc) and consumption uses so it has a floor price and the overall trend is not as volatile as crude oil. China itself buys 20-25% of the production, not accounting for other Asia countries like India, or likes of P&G manufacturing cosmetics.

Why this company:

Downside protection:

1) Floated at 25p in 2006 and the last big insider transaction (14%) was done earlier this year at 4 pence per share. The breakout was primarily due to 2 directors buying 500k shares 3 days ago. Also according to the most recent regulatory news, they have just a little under £5.5m in cash, with a total of 151 m shares which works out 3.67 pence per share, not far off the current share price. The company won't just go bust running out of cash in a few months, nor need to rely on banks for expensive working capital with high interest charges.

2) The plantation/refinery is located in Malaysia, by far where it is most exported; it is a well-established trade with full government encouragement. License to refinery has been granted and it is well away under construction.

3) Good palm oil price, the current spot for the crude palm is $650 (also a recent upward breakout) and the future contract is showing a gradual increase. The production aim of 200k tons can be easily absorbed by the demand, as the delivery on September contract alone was around 1.2-1.3 m tons. So little downside as to over-supplying.

4) Going by the last financial and interim report, you have a total of £30 m asset for a market value of under £6 m. Even applying a rather crude haircut as a rule for margin of safety of 50%, you are still left with a business that has asset value 2.5 times of the market cap at this point of writing. Just the cash alone adds a significant protection in this de-leveraging credit marketing. No debt!

5) Directors: From BP/Halliburton, etc, who are no stranger to oil production/refineries.

Upside:

1) As mentioned above, it is fair substantially undervalued

2) Profit projection: Best to use a company that does heavy palm oil plays - Wilmar International. In the latest annual report, Wilmar reported that in 2007 they achieved pre-tax profit of $18.47 per ton. We are using 2007 data because according to graph above, 650 would be around the mid-point of the prices that occurred in 2007 (though my personal gut feel is 650 would be the upper quarter due to advance planning and procuring lead time).

So 200 k x 18.47 = $3.694 m

Note the above would be likely to be the lower end and I wouldn't be surprised if the profit per ton would be at least 30% higher, solely because the lower cost base (variable cost by far the most and comes in shapes of plants/agriculture and labour; refinery as a fixture is good for many years, as is land) and the forecasted higher demand (see Wilmar's report). So for argument sake, they get $24 per ton, which would be $4.8 million.

It is unlikely to go meet full production in year 1, which is next year they are expecting the refinery to come on line. However it should be producing positive cash flow right away (no problem with buyers) and full production rate within a year. This trade is something that's well practiced in Malay, so tech/labour isn't an issue.

Applying fair multiple of 10 times (defensive usually trades at 12-15x, using difference as a margin of safety) to pre-tax profit yields a valuation of $48 million (over £28 million). This doesn't include dividends, other assets and further expansions...


The showstopper and kicker:

1) It is traded in US dollars, but for the time being it's not bad against the pound like 2 yrs ago where it was $2 to £1. The pound down trend looks rather worse than dollar's, which means we will get more profit in pound.
2) Can upgrade production by buying more land and the option can be easily re-negotiated, just as the company did when it backed from down from 50 acres to 14 acres. Likely to meet the initial plan of going from 200k to 1 million for extra acres of land costing of £2-4 million which can be amortised over years.

Edit: fixed some typo on numbers

Edit2: forgot to say, calculation is done on pre-tax profit, and not earnings! A massive difference (using earnings would show even better numbers).

[finalx]

An update from RNS: They have secured a bank credit facility of RM 47 million, and coincidentally the total cost for the refinery is around RM 40 million, so it can be finance entirely off that with buffer to spare. This is in addition to the several million pounds at hand, so they won't be facing any working capital/cash flow squeeze. However due to negotiation on the refinery plant contract and banking facility, the production operational date has been put back by a few months.

Recent share price has form a base around 3 pence and I believe the secured finance would mean it won't remain off the radar for long. Target price: 24-30 pence in a year (refinery operational in Sep 2010, so as previously mentioned, up and running within a year).

Very good news.

[finalx]

A key resistance at 4 pence has been broken through, and the sp has risen over 40% since last post on securing finance. Still very much under-valued, and 9 more months until the refinery opens. Target price unchanged.

[finalx]

Sorry, for some reason edit button vanished.

Today it closed at 5.12, with 7.5 m shares traded (3 months daily average about 200k).

Something is building up behind the scenes. At this time I don't recommend taking profit, as there isn't any need to prior to opening and start of the refining operation. Reward comes to those who waits a little longer.