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Emerging Companies: Tandou Limited (ASX: TAN)

Published 16-MAY-2014 00:00 A.M.


1 minute read

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Overview: Tandou Limited ("Tandou", "the Company") is an Australian agribusiness and water investment company. It owns rural property covering ~127,000ha near Menindee, NSW, and 6,000h near Hay. Its farming operations have the capacity to produce ~110K cotton bales pa. It also owns 84.5 Gigalitres of water entitlement in the Southern Murray- Darling Basin.


Catalysts: Expansion of farming and water trading operations have driven two years of profit growth and scheduled plantings are expected to support the trend. For FY14 and FY15, the total cotton area has the potential to rise by 20% pa toward 11,000Ha. Forward sale pricing for FY14 is 5 percent stronger yoy. The share price is trading at a discount to its Net Tangible Asset (NTA) backing, which in turn understates the market value of Tandou’s water and land assets by approximately 25%.

Hurdle: Weak cash flow profile and April $25million entitlement offer suggests Tandou’s business model remains reliant on external financings. Forward sale of 87% of FY14 cotton production at an average price of $476/bale may limit earnings upside potential in the short-run. World cotton markets are influenced to a large degree by the Chinese Government, which holds50% of world cotton stocks.

Investment View: Tandou offers profitable exposure to water assets in South Eastern Australia and international cotton markets. We are attracted to its strong asset backing and ability to strategically shift resources between cotton production and water right sales depending on market conditions. Water assets account for approximately half of its NTA. With its recent entitlement offer mitigating funding risks, we initiate coverage with a ‘buy’ for its capital growth potential.


General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

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The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

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