Teak Investment - A market-transparent

Teak is a tropical hardwood primary and requires 20 to 25 years to grow into a commercial forestry plantation. The origins of plants from Asia, but today’s teak plantations are found in tropical climates various Central and South America, Asia and Africa. Investments in a teak plantation is said to be one of the most attractive investment opportunities in the long run, avoid deforestation of natural forests and production lead investor returns over 10% and therefore was allegedly beaten the stock market.

When looking at specific investment opportunities available in teak, the individual investor is faced with a jungle of different providers and options for “Best Buy”. Making a proper comparative analysis is difficult, time consuming and there is a lack of data so it is very difficult to really understand and evaluate the available options. For the uninitiated, it is almost impossible to compare the different offers teak investment and the investor was soon lost and face the only option to trust everything they said.
TIR

Most teak investments highlight the potential return on these investments and the use of Internal Rate of Return (IRR) as the best proxy (or sometimes also known as return on investment ROI). The IRR is a subjective matter to the future budget, derived from expected cash flows. Showing a flow of cash flows in and out does not necessarily mean that the finances are set in stone, in contrast to the estimates depend heavily on underlying assumptions. Teak, only a few assumptions and define most of the cash flows:

- Price inflation estimate

- Base course sales price per m3 of teak

- The volume of commercial timber tree (m3)

- Weight Loss Program

Inflation is difficult to calculate in the future and in some cases historical data is used for purposes of justification. Just to mention dynamic, supply and demand in the future could be very different from the past, while a base selling price must correspond to a realistic price achievable currently observed in the target market.

To estimate the expected volume of timber, the diameter of the tree is especially important when buying an existing plantation. However, if the diameter looks excellent, the trees must be straight and must have sufficient space to grow to maximize business value.

Weight loss program defines when commercial thinnings are made to remove the bad trees and leave more room for good to continue growing (natural selection). In order to have a commercial value, the timber must have a certain age. For purposes of estimation by thinning hours earlier, a positive impact on the IRR, as the investment horizon is shorter.
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Changing one or two fundamental assumptions of the model results as cash flow and IRR different. Therefore, more important than looking solely the result (TIR) ​​that is important to review the assumptions and potential risks of the investment proposal.

Since all the assumptions are subjective and can be used to “push” the IRR, showing a more optimistic outlook for attracting investors than in reality. So it’s important to check that the assumptions are consistent with observations of reality. Without a proper comparative basis, it will be difficult for the individual investor to challenge assumptions and to put in context. Teak investments are long term in nature therefore require strict discipline in the handling of cash. Combined effects of incorrect assumptions could have a devastating effect on investors: the company runs out of cash, requires more funds and existing investors could get diluted. So from the standpoint of investors, is more important to be comfortable with the assumptions rather than the IRR.
Risk

Teak investments have different risks of starting in the wrong place and location analysis, fires in particular, can damage young trees, while older trees are more resistant to them. These risks are especially relevant for Greenfield projects after the first years from planting trees. Over the early years leads to larger trees, thus reducing the need for maintenance work and the results are clearly visible. Thus entering a plantation in a more mature stage should actually show a lower risk when the first years have already passed.

From the point of view of investors, as important as technical risks, the risks of the investment itself:

- Quality of plantation management

- Liquid assets

- Paying too much at the time of the acquisition

- Insufficient investment

- Legal risks

It is important to get the confidence that the plantation management has the ability to carry out maintenance properly to maximize the commercial value of trees. What helps is to look better here reference projects and actually check that the weed has been cut and the branches are pruned.

Private investments are illiquid teak in nature and therefore investors must be prepared to be invested during the project time. One way to mitigate this risk is to invest in a project involved in the plantations of various maturities, so that expected cash flows in progress rather than being exposed to a final crop year. The other option is to sell the investment before the harvest, for example, in year 10, which in theory is attractive to a new investor (shorter investment horizon), but in practice it is difficult, because the market is not very transparent and is difficult to find a buyer. However, contact an independent agent, as an alternative investment may be advisable.
Price per hectare

Price per hectare on the basis of actual costs to pay for an investment, so it is less affected by subjective bias the IRR. Teak plantations have similar activities - trees - and the cost structure is quite similar. Therefore, price per hectare is a quick ideal ratio comparing investment options in the industry. From the economic point of view, price per hectare must be low to enter into an investment. However, a price per hectare should always be considered in the context of a risk analysis. May be valid reasons why it’s worth paying a higher price per acre if it helps reduce the risk:

- Sustainability certifications such as FSC timber should be allowed to sell more certified wood buyers who do not, thus reducing the risk

- The added value, such as a mill can allow capture more value across the value chain

- Quality of plantation management, affecting the risk of poor maintenance of plantations

Factors like these affect the equation risk / return, providing grounds to pay higher prices per acre than a similar opportunity to sample the arguments of lesser quality, so it has a higher risk.
Conclusion

Some industry people may say that financial forecasts are only whole numbers based on estimates and has not much to do with the reality that is growing at a tree. From the point of view of investors are wrong. Visit a plantation and see it in good condition is not sufficient to complete a Due Diligence. You should only invest if the expected return outweighs the risk. So this requires a thorough analysis of the financial perspective, the entry price, the risks and how investment refers to investment proposals.