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Obviously, the higher priced any financed shares are, the fewer need be issued. At $3/share, I'm all for financing, even more than the $15m - $20M. Fine with me if Solomon issues 15M shares in 2013 to increase and accelerate capital development by $45M.
Obviously, this is entirely different than the reward of $15M being bought with the dilution of 30M shares.
But, just because you think that curtailing issuance gets the share price to $3.00 in July does not make so, or even likely. I agree in direction, particularly if some pledge were announced, but not magnitude, not even close. Course, I'd be delighted if you are even close to right.
And of more complication, there may be commitments already in place.
Point is that the company limits the new shares as best it can, and as long as it can, and as well as it can: meaning, within whatever constraints, wait for the listing; optimize the means of financing (loans, bonds, limit expenses),
Thanks Snow.
Having met and talked to Nisse in China, I'm very glad he's decided to get more involved with this company than any other. Little doubt that he is the major influence in the move to FN and a bond offering possibility.
This part of his response is very encouraging:
"There are also alternatives to further accelerate growth and or
> Change its financing plan. The latter I can NOT in detail to speak of."
This may be saying that they have alternative plans to adopt one or more of the cost cutting things I suggested in lieu of financing thru straight equity, or more likely their own ideas. I interpret this to mean that curtailing capital expenditures is an alternative to acceptable means of financing (bond and or acceptably higher price). If the statement does not mean curtailing some marginal cap ex, then it must mean that there are equivalent non-publicly stated alternatives. I suppose this might mean a grander partner, for instance.
I'm all for expanding as quickly as possible, as long as the marginal capital is also accretive, or near so.
Imo, it's informative that Nisse responded so quickly, as he may well be prohibited from even this much after Jan 1. I am also aware that internal plans (including financial projections) are probably less conservative than public statements, as the company is restricted legally; and probably by perceived legal restrictions more than actual, particularly as linguistic tightrope walking is not their forte. This is an argument for a sharp spokesperson, who speaks English as a first language -- soon, another native Swedish speaking spokesperson.
In all honesty, I do not buy the patent and first mover argument, other than in general. It justifies pouring perhaps all current income, loans, and grants into growth, but not the marginal extra capital development if that final $15M dilutes eps 15%, let alone 30% (not to mention overhang).
Snow,
Feel free to copy my post in an email to him, if you endorse it, along with your own views.
I think that Nisse is sympathetic to the overall ideas; also, more privy to the inner workings both of the company and the exchange and bond possibilities in Sweden.
Agree with your scenario.
Problem is, despite your oft implied view that you are smarter than Solomon, what you are suggesting and I endorse takes no genius.
I worry that the time to implement your scenario was six months ago; certainly, it would have been easier then. But perhaps there was a trade-off at that time between signing a large contract and taking his foot off the issuance gas pedal.
Nonetheless, hard to see that there is not now some leeway for the next 6 months.
And they need to communicate that they have alternatives, whatever they really are.
Hope so ...
I trust that it will change in the future; unfortunately, "the future" appears further and further out.
Pains me to say, in some respects, but until proven otherwise, I agree with RD that there are ways to limit dilution in 2013 (vs. 2012), and that to do so is eminently in the company's interest (as opposed to shareholders' alone -- there's a difference).
If 30 million new shares bring in only $15M - $20M, I see no reason the company cannot pledge to use only half of the newly authorized shares in 2013, at most.
Until I'm shown why this cannot be, why can't the company do any combination of the following to limit cap ex to say $100M or even $110M, rather than $115M - $120M:
1) defer the the 2012 dividend (payable in late 2013), "saving" ~$3.0M of the $15M - $20M
2) defer upping the equity stake in one or two fish farms one year
3) building one fish farm for cash, without the equity participation
4) selling the least valuable, or least immediately needed piece of land (LUR)
5) greenhousing HU over two years, rather than one
6) issuing shares opportunistically after the FN listing and/or a bond deal; in any case, only > $1.00
7) franchise restaurants before investing in too many more company owned prototypes
8) master franchising APM technology to one province
9) whatever else
Viking.
Fair enough. I just meant the selling pressure is "winning" because the price is so low. There is now evidence, by the way, that the dumpers have lost any money.
When you say the Swedes are the winners, because collectively they have a lower and lower average cost, I guess that makes me a winner too (and you).
I sure don't feel like a winner.
And if the share issuance is not ending, I'm not sure that seeing the same movie again will make you and me real winners; not until we see the sequel: SIAF, Part 3, The cash flow positive, spinning out version.
Fairly radical idea to have a Swedish CEO. After all, it is rightfully Solomon's company.
If there were one, or Swedes on the Board and in management, what would their views be on raising capital through equity, or even any capital beyond operating income, loans, grants, JV partners?
As far as I can see, this marginal capital raising is Solomon's one Achilles heel.
For 15% extra capital, he dilutes the company 30%, and buys 100% of his problems, IMO.
Team dumpers has killed team Sweden, because the score isn't $.51 - $.51.
The score is $.51.
Not sure if Stolpen meant a $.65 dividend yearly after three years as you interpret.
My interpretation was there could be $.65 in total dividends in the next three years. That seems entirely plausible, with the big caveat that a spin out happens.
To me, the spin out is the kind of plan and projection that Solomon has made in the past and come through on, though not necessarily exactly on time. Like operational performance, like uplisting from pink sheets, like pursuing dual listing, like a marketing and distribution center after some wholesale critical mass, like retail/restaurants to follow, like a dividend, etc.
And if $.65 total in three years happens, the shares won't trade at $.50.
Agreed.
But that was the shared risk the shareholders took with the company.
My position is that the company did not have any choice, as commitments were made based on reasonable assumptions for the share price. They did not happen.
I believe this situation is changed for 2013, because the low share price is known and real cash sales are being generated.
So, now, alternatives can be pursued, and are.
I have an entirely different view.
What you bought two years ago were shares of a VERY, VERY small company with an idea. It was a pink sheet company more akin to a small private company with its first venture capital funding.
If you thought it would take only a year or two to gain the credibility to sell to funds on a proper exchange, that figured to be over optimistic from the day of the investment.
Fine that you thought the value would increase, but the markets said differently, and not because of dilution alone.
Dilution was always -- and was clearly stated -- as part of the plan to grow, That had to be part of your dd.
Now, I agree that because the share price is so low -- and because in 2013 the company is starting to earn real discretionary cash income that the dilution should be diminished or alternatives found.
So, they are trying. Let's hope they succeed.
Curious, would you buy part of a 10% interest bond with 1/4 dollar value invested kicker in say two year warrants to purchase shares at $.80? Do you think a kind of rights offering of this nature to existing shareholders (JF +) would attract a large portion of the $15M cap ex apparently budgeted in 2013 beyond non-dilutive sources?
If Q4 earns the same as Q3, then Q4 income will be $.23 on about 96M shares. and FY 2013 earnings will be $.71 on about 86M WAOS.
Q3 had a very high net margin. Don't know that they can duplicate that. Meeting revenue guidance would mean slightly higher Q4 over Q3. Will be interesting to see what one month of WSPS brings in revenues and income.
The Swede market can only be good, because it is on top of OTCBB, not in place of. How good?
Guess we'll find out.
But it could be very good indeed, as there is no Chicom stain there, and SIAF will be the only Chinese Ag company listed, having just passed in country regulatory approval. We already know that it has and will get fund interest.
And I'm sure that SIAF will show among the best, more probably the best growth profile of any FN listing.
It is unquestionably a good move, with zero downside. It also positions the company for a bond offering or private placement, perhaps of some hybrid nature.
My hope is that SIAF pre-announces a preliminary 2012 FY earnings range of $.65 - $.73 before the listing, and gets a p/e multiple of 1.5 within a short time (o start).
There are lots and lots of reasons that this company is real and honest; including the dividend, Form-10 enquiry after chicom meltdown, new FN dd; Jordan Fund dd; the facilities are real, as investors are invited, etc., etc.
I don't like the dilution either. I'm trying to understand it better. But I do get this, and you should too. The overall capital development is very, very large for a company this size, and it is very, very, very accretive. It generates absolutely fantastic returns in income now, and cash in 2014.
More importantly, especially for our opinions on the dilution issue, Solomon is doing exactly what he said he'd do. This is no deception or even surprise, whatsoever. He announced long ago that there would be share issuance through 201. And 2013 is the last year. So, he's executing a well publicized plan. That's pretty forthright; the opposite of fraud.
And as an investor, you knew his plan, or should have.
Now, the dilution is costing more in eps than one could have anticipated. Therefore, in my opinion, it should be curtailed or lessened, if possible. I am not entirely sure that commitments have been made in accordance with the 4 year plan that cannot be reversed at this point. (I argue and think they can and should, but I'm not sure)
But we know that Solomon is seeking new means to raise capital, other than equity issuance. And he is seeking means to issue fewer shares if that's the only way, and in a more shareholder friendly manner.
So, in essence, he has seen and listened.
Why suspend critical thinking on the preeminent issue for the company in the coming year?
Ecuador has done the basic dilution math. It's not just "6 of one. hslf dozen of the other." The dilution diminishes eps in a big way, at these share prices. And Bear has offered the most plausible reasons for the dilution.
The main point to me is whether or not the marginal cap ex -- the last portion received from share issuance -- is within the company's discretion to go forward only when the return is favorable or not, given at least a year's lead time.
What hangs in the balance, pretty much, imo, is the share price over the coming year. We've already seen what 30M shares overhang does.
This is why I think the company needs to do a much better job explaining how and why 2013 should be greatly improved on that front:
1) FN and acceptance in Sweden may boost price. A doubling in price would cut the number of new shares in half. This is something that full fledged IR would have means to do -- through the press, analysts, road shows, a Swedish rep. (so, hopefully, this part is coming)
2) A bond deal. If the cost of capital is interest and some warrants, the Ecuador math goes out the window, and so does most of the over hang problem. This wold be a huge win, even if it were some kind of hybrid deal. (so, hopefully, this part is coming)
3) There are ways to reduce cap ex, or increase discretionary cash, such that less shares need to be issued in 2013. What shareholder would rather see 30 restaurants and 130M shares eoy 2013 vs 10 restaurants and 100M shares? Or a one year delay "greenhousing" the remaining HU acreage? Or building a new fish farm without the equity buy back? Etc.
If these things would not eliminate the need to issue shares, if the company's JV deals create commitments for 120% of its cash income producing potential across all lines, regardless of the possibilities above for instance, I'd just like to know how and why.
Okay. Fair enough.
Because of cash flow, and size.
Both are changing over time, and maybe he will get a bond deal.
How is this company going to grow 60% from ONLY the $15M that comprises the 30% dilution?
You are saying that 2013 earnings -- not revenues -- will increase about $42M because of an extra influx of $15M invested back in the business.
It would work if the 30% were sold at a p/e of 5 or so; in that case the 30% dilution would bring in $100M or so, not $15M.
I never said he'd need to lead investors on to issue shares opportunistically. He would not. That is so obvious as not to even need mention. So, bringing up dishonesty is not an issue. Glad you will now drop it.
As for your hearing me say anything about dilution, I cannot be responsible for what you hear.
Sure, the greater issue for pps is overhang. And the total capital development budget is clearly accretive. I do understand benefits beyond eps, in terms of quicker vertical integration and overall corporate strategy, including barriers to entry. They aren't nearly enough in value to shareholders to overcome diluted eps, imo.
I will listen to arguments why the dilution is not marginal; in other words, that Solomon's hands are tied. That is different: still negative per se, but necessary.
And where we agree is that in any case, the total development does generate a whole lot of income, and will generate a whole lot of cash, and that the overall business plan is brilliant.
But if the dilution is marginal, and at these share prices, it is unarguably dilutive to eps, and will never be recovered in eps. It hurts shareholder value in the interest of growing a larger less valuable company on a per share basis. The argument that absolute dollar income is higher is meaningless.
We can all hope for a bond deal, and for a higher share price, dramatically lessening dilution, if needed at all. And we can all hope for a higher p'e multiple as larger status is realized with or without the last 10% of CapEx dollars spent.
But blanket positive spins -- anti-math as they are, as Ecuador also points out -- just demotes credibility, imo.
Nobody ever suggested -- and nobody would, for the last time, have Solomon say dilution is over when it's not.
That's insane, or savage or something.
Any dilution should be done prudently, at the highest price possible, if at all.
Has nothing to do with honesty or lying.
Sly,
IMO, math does not support your argument, plain and simple.
Bear has a better argument, about the still marginal (I believe) development cost helping to create a sufficient critical mass to justify a higher p/e multiple. This is the crux of why RD's PEG theory is wholly inappropriate for this company now.
Bear is right, no doubt, on this point in direction. So, I hope he keeps posting: he's highlighted the most important issues about the company, and the arguments are valid, on both sides, imo. A better understanding would only help all of us.
Unfortunately -- in a sense -- in my view, the critical mass will come regardless of the marginal investment. And if that investment comes at the cost of 30% dilution, it's not worth it. And, I don't think this is even close. The size reaching a critical mass is no doubt important, but so are the eps. And I would not sacrifice the later for the first, unless it were very substantial, and very fast.
Solomon seems to use NTA as a favorite measure of critical mass. How is an extra $15M investment going to make that much difference, especially while the sacrifice to eps is clear, AND, the acceleration of capex is only delayed a year, when the funds don't have to come from new shares?
Again, I'd back off this, if the "marginal" argument is disproved by means of some inherent built in commitment that eliminates financing discretion.
For instance, why couldn't Solomon build one FF without retaining the right to 75% equity? He'd still have 25% equity, and all of the construction and consulting profits would be discretionary cash. He'd "lose" the future profits on the 50% equity he would later buy, but:
he would retain -- read gain -- 30% more profit on all the fish farms by virtue of dividing the profits by 100 rather than 130! Admittedly, this assumes $15M profit, and a share price of $.50, both not far off current situation.
How would this $15M cash not eliminate the need to issue $15M worth of new shares?
Ecuador,
Yes, this is exactly right. And we are not even close to issuing shares at a p/e of 1 currently. As of now, the return has to be 200%. So even with a 40% net margin, $15M from 30M shares has to generate about $75M in revenue just to maintain eps, if, as I think, the share issuance mounts to marginal cash.
Do you agree that the company has or should have discretion to cut back cap ex when market conditions are unfavorable?
Bear's point, I believe, is that the overall business model is held hostage to the share price, no matter what (unless, of course there are alternative means to raise cash, like the bond offering). We can all agree this is preferable (well, maybe not Sly, who seems to think favorable offerings are somehow dishonest).
So, I am willing to learn how this locked in, non-discretionary stance may be the case, though on the face of it, I don't see why or why it could not change.
Also, I do agree that beyond the most direct and most important eps calculations, there are strategic and almost "network effects" of rapid vertical integration, just not enough to delay the last $15M of development until2014 if need be.
I think that the new Board members are on top of these issues.
Also, having spent some number of hours on bus rides with the company's corporate attorney, I am aware of the importance of Solomon's taking a conservative business and public stance wrt expectations and projections.
Well, this is the exact point where we disagree.
Clearly, Solomon's overall capital development budget is accretive, very much so. That's the basis of probably all of our interest.
I simply do not see how you can say the new share issuance portion is not marginal. I imagine that every JV deal can be "repaid" in not only the 25% equity they start with, but also either cash or shares. Likewise all debts to suppliers should be payable in cash, or shares, if necessary.
But maybe you can explain this to me. If Solomon's overall plan does not have - and cannot have -- the discretion to cut back on share issuance when the market is unfavorable, given more than a year's time lead -- then, I'd change my position on this.
In any case, he is building a very profitable machine, but one that will be significantly less so with 130M shares, imo.
Also, if the 30M shares generated $30M, I'd be only 1/2 against it as I am now. Even then, I'd 100% prefer that it be $15M for 15M new shares.
Would love to see the company pre-announce unaudited full year 2012 results before the FN listing. A conservative range would be fine; even say $125M - $150M revs and eps of $.65 - $.75.
Could couple this with a corporate update, with special emphasis on the WSPS and retail/restaurant progress; in other words, how the vertical integration is shaping up.
Think this would be a fantastic update to the FN prospectus, and help inform Swedes about the company and the listing.
No idea what you're talking about, unless facetious.
"The whole is greater than the sum of its parts" is so recognized it's a maxim (as opposed to mystic crap). And it supports the notion of cap ex spending to achieve vertical integration.
Nonetheless, it is the marginal cap ex I question. It may well be that the discretionary cash -- and there are plenty of cash generating sales in 2013 -- may be locked in the JV subs, but this is something I'd like a lot more clarity on.
Bear,
Pretty much, I agree with 90%-95% of what you're saying. But it's the 5% - 10% disagreement that I equate to the marginal cap ex investment that comes from equity issuance. If there is absolutely no corporate discretion, as you imply, well, then okay the die is cast.
But I think that there is or should be some discretion, after this long, with the price this low.
For the sake of argument, let's say they would make $150M income in 2014 without new shares. That's $1.50/share at 100M shares. Yes, that's a lot. But with 130M shares they have to earn $195M to get to the same $1.50 share they would have had at 100M shares.
Obviously, the marginal extra of CapEx ($15m) from the 30M shares will not earn an extra marginal $45M in net profit.
I do agree with your major thesis that the vertical integration is basic to the plan, and that it will make the total more than the sum of its parts. And further, it will create strategic barriers to entry for competitors.
I just hope they can do it with say 10M-15M new shares. So, I have hopes for the bond deal; more so for FN and Solomon's prudent, honest, opportunistic share issuance, coupled with modest restraint.
I should let you finish your post.
From what I read, your argument was my expectation for 2012. That made sense.
But I expected, and still expect 2013 to have discretionary cash. And it would bother me not one bit if HU did half the greenhouse in 2013 when cash is so tight, and 1/2 in 2014 when it wasn't.
Would that not "save" 1/2 the $8M price tag, with 75% or $3M available to the holding company, should it choose. If $15M is the cap ex goal above and beyond all other means, would that alone not reduce 2013 share issuance from 30M shares to 24M?
Yes, FF1 just started production, but 2013 will net quite a bit of cash profit. And PF1 and PF2 will start.
Net, net, don't you think they will make $1.00 +/- per share in 2013? That's $100M. I understand that much of that is basically automatically reinvested, and another portion is reinvested as a matter of good business sense.
I have assumed that new JVs and their subsequent equity accumulation are self-funded or very largely so through their own contracts. No?
Are you saying that 2013 profits of $100M have no discretionary cash -- which I suppose may be possible if large enough exponential growth is already committed?
In any case, I assume you agree that FN may help a higher price, and it would be prudent (and honest) to issues at a higher price; also, a bond deal is preferable, yes?
Plays tricks?
Are you actually suggesting that he make no efforts to sell the shares at a higher price? Are you also against his seeking alternative means to raise cash?
He is not boxed into when he issues shares. To do other than limit the dilution is dishonest to his current shareholders. But apparently you feel selling at a low level is honest to you, but selling at a higher level is dishonest to the new purchasers. That's great.
Is this another correlation of triangles thing?
Agree with Viking on this:
Swede,
Why August? We not July, September, October, etc.?
Sorry, I meant cancelling the 2012 div payable in late 2013.
Because obviously, cash is still tight in 2013, or rather cap ex plans are ever again expanded; otherwise, there would be no need to issue a whole lot of new shares.
I've been in the camp that Solomon should pay the dividend, just to make good on his promise. I maintain this stance.
But, if he coupled a statement about cancelling the 2013 dividend with a declaration that no new share issuance will be needed to fund cap ex, I'd be delighted -- market too, I'd guess.
If a bond deal is put together, this would be easy, in my view.
This is one reason I asked the question about the F shares. Has a promise been made to pay 1/2 of 2013 dividend in F or G shares? If not, and still the 8% of income promise prevails in plans, a one year hiatus would pay the debts 10M shares would cost at this level. (5M anyway)