Small Caps | Feb 24 2014
-Robust sandalwood demand
-Potential new pharma channel
By Eva Brocklehurst
Sandalwood has a distinctive and exotic fragrance. Its oil is a key ingredient in the perfume industry but there's another value that may become significant. The main player in Indian sandalwood plantations in Australia is TFS Corp ((TFC)), a Western Australian company which owns 2,400 hectares in Australia's tropical north. TFS owns the distiller of sandalwood oil, Mt Romance.
Moelis is quite positive about the stock, expecting more than $2 billion in earnings over the next 15 years. Moelis has a Buy rating an $1.40 target price. Harvest proceeds may only start making a material contribution in FY17 but the broker is excited that, within a decade, earnings from the company's plantations could exceed the current market capitalisation.
Where the added value may com from is in medical treatments. Viroxis, a US pharmaceutical developer, has announced a positive development in using sandalwood oil to treat warts. The phase 2 clinical study used East Indian Sandalwood Oil, to be precise, for the treatment of skin warts. Viroxis plans to meet with the US Federal Drug Administration (FDA) to obtain approval for Phase 3 trials for a prescription HPV/wart treatment. In the US, the prevalence of HPV/common warts is thought to be as high as 10% in certain populations.
The company, based on FDA feedback, will also initiate a new placebo controlled, phase 2 clinical study for the treatment of Molluscum contigiosum (MCV). MCV is a prevalent, highly contagious viral infection of the skin, mainly affecting children. There are currently no approved prescription treatments for MCV. Informal studies conducted by Viroxis indicated that EISO was very well tolerated. The possible anti-viral capability of EISO has potential for a variety of treatments. Viroxis sees a potential US$2.8bn in skin warts treatment in the US alone.
Moelis expects TFS to become the sole global provider of sustainable EISO over the coming year. Demand from the fragrance, carving and religious market for both the wood and oil remains robust and, at the very least, the pharmaceutical channel will support pricing. Furthermore, Moelis thinks that sector is will to "pay up" to guarantee supply of a key active ingredient. The company's first commercial harvest is to recommence in May and the broker expects insights into the sales data to be provided at the November AGM or by the first half result in February 2015.
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