Shares in troubled sandalwood grower and plantation manager Quintis Ltd (ASX: QIN) have plunged 35% to a multi-year low of 70 cents today after the company conceded its Santalis operating subsidiary had lost a pharmaceutical grade sandalwood-oil supply contract.
It has been acknowledged that the contract between Santalis and Nestle-owned subsidiary Galderma was terminated in December 2016, although the Quintis board is claiming it only became aware of the news today, despite Santalis being its wholly owned operating subsidiary.
The news of a major contract loss must have escaped the attention of Quintis’s senior management as well then for an entire 4 months given they’re supposed to report into the board, which brings into question the credibility of the company and explains today’s savage share price falls.
When Quintis was formerly known as TFS Corporation it controversially agreed in June 2015 to acquire U.S. based pharmacetucial businesses Santalis and ViroXis in cash and scrip deals that appeared to offer little upside to TFS shareholders.
The decision by TFS Corp to pay a fixed minimum of US$23.5 million in cash and scrip for two businesses generating hardly any revenues (ViroXis had no revenue) I described at the time as “extremely generous” and involving “left field” decision making from management.
In fact the deal prompted me to sell my entire shareholding in TFS Corp vey soon afterwards on the basis that the company did not pass the sniff or credibility test given concerns around management’s oddball decision making.
That was around 20 months before U.S. short selling specialists Glaucus Inc. claimed Quintis’s shares were worth zero due to multiple alleged misrepresentations the company had made as to the operating performance of its business model.
Glaucus also attacked the marketing material of Quintis and credibility of its management team for allegedly misleading investors over agreements it had with Chinese distributors to buy the sandalwood.
However, the issues around Quintis have been plain to see since June 2015 and there are too many red flags around the operation of the business to make its shares anything other than a sell in my opinion.
However, I may be wrong and Quintis may in fact be able to operate a sustainable, cash generative and profitable business thanks to underlying demand for its sandalwood products.
The company itself is still forecasting for financial year 2017 “cash EBITDA” to be up 25% on FY 2016’s result, with the first half of FY 2017 producing $7.6 million in “cash EBITDA”.
Still, I think there’s no need to take a risk on Quintis shares when there are probably at least 100 investment grade companies across the Australian stock exchange with a good chance of crushing the market’s returns over the years ahead.
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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.