TPI Enterprises (TPE) BUY TERP: A$2.34

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1 TPI Enterprises (TPE) BUY TERP: A$2.34 Company-Transforming Capital Raising Complete Target Price: A$3.55 TPI Enterprises (TPE) has undertaken a A$44.2M capital raising comprising a A$20.9M Placement and A$23.2M Entitlement Offer (one for five) at A$2.20 per share. This is a company-transforming issuance, fully funding TPE s medium term growth ambitions. The company now has sufficient fire power to: 1) purchase straw equivalent to c.100t of NRM from farmers; 2) stand up its Portuguese API facility; 3) significantly reduce debt, and 4) entertain other potential growth avenues. With funding now resolved, and contracts and stock in hand sufficient to meet 2017 guidance of 55t-plus of sales, the business risks reduce to execution only (as opposed to funding and agriculture). Given the scope of growth anticipated in guidance, such execution risk shouldn t be taken lightly, in our view, but for 2017 versus 2016 we re comforted by the oversight of a stronger and deeper Board, and a narrower set of variables requiring ongoing management attention. With the TERP of A$2.34 close to all-time lows (of A$2.20), we see a significant value opportunity in TPE here. BUY. Equity raising details Placement 9,500,000 shares at A$2.20 for A$20.9M. Rights 10,545,455 shares at A$2.20 for A$23.2M EPS dilution 20.8% (we already factored a A$20M raise in our forecasts). Post-raising 2018 PE 21.4x. 2017F (Dec. balance) net cash A$23M. Use of funds Crop payments A$15.0M; implies 100t of NRM. Debt reduction A$13.0M reduction to current debt. General working capital A$8.2M. Portuguese API facility A$6M stand-up capex. General capex A$2M for new harvesters, lab upgrades and further process refinement. Valuation and outlook DCF reduces with the dilution of the raising to A$3.56 per share (-41c), partially offset by lower debt. Target price now A$3.55 (-35c), in line with DCF. Next catalysts securing pending toll processing contract (March/April 2017); other new contract wins (4QFY17); market update/agm (May 2017); potential for medical marijuana research licence (4QFY17 1H18); UK API batch validation (3Q/4Q CY17); refinancing of debt (CY17). Company Data Shares ordinary (M) 72.9 Dilution (M) 0.0 Total (fully diluted) (M) 72.9 Market capitalisation ($M) month low/high ($) 2.20 / 4.40 Average monthly turnover ($M) 3.5 Index None GICS Industry Pharmaceutical & Biotechnology Financial Summary (fully diluted/normalised) Year end December 2015A 2016A 2017F 2018F 2019F Revenue ($M) Costs ($M) (13.8) (18.5) (24.2) (29.1) (33.3) EBITDA ($M) (10.1) (7.9) NPAT ($M) (14.8) (13.6) (1.1) EPS ( ps) (20.3) (18.6) (1.5) EPS Growth (%) n/a (8.3%) (91.9%) nm 45.1% PER (x) (11.5) (12.6) (154.9) Free Cashflow ($M) (0.2) FCFPS ( ps) (0.0) PFCFPS (x) nm Enterprise Value ($M) EV / EBITDA (x) (18.2) (25.0) Payout ratio (%) Dividends ( ps) Yield (%) TPE performance over one year Mar-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Mar-17 Disclosure and Disclaimer This report must be read with the disclosure and disclaimer on the final page of this document. Petra Capital was Exclusive Broker for TPE s Placement and Rights Issue to raise $44.2M at $2.20/share on 22 March 2017, for which a fee was received. Nick Berry

2 Analysis TPI Enterprises Year end 31 December MARKET DATA 12-MONTH RELATIVE SHARE PRICE PERFORMANCE Recommendation BUY Price $ 2.34 Price target (12-month) $ week high / low $ Market capitalisation (fully diluted) $m Shares on issue (basic) no Options / rights no. 0.0 Other equity no. 0.0 Shares on issue (diluted) no Mar-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Mar-17 INVESTMENT FUNDAMENTALS F 2018F 2019F PROFIT AND LOSS F 2018F 2019F Reported NPAT $m (25.9) (14.0) (1.1) Total revenue $m NPAT normalised $m (14.8) (13.6) (1.1) Costs (COGS & opex) $m (13.8) (18.5) (24.2) (29.1) (33.3) Source: Petra Capital EBITDA $m (10.1) (7.9) Reported EPS (undiluted) (35.5) (19.2) (1.5) Depreciation & amortisation $m (3.6) (2.9) (3.2) (3.4) (3.4) EPS normalised (undiluted) (20.3) (18.6) (1.51) EBIT $m (13.7) (10.8) Growth % n/a (8%) (92%) (823%) 45% Net interest $m (1.1) (2.8) (1.7) (1.7) (1.7) PER normalised/undiluted x (11.5) (12.6) (154.9) Non-operating income $m Pretax Profit $m (14.8) (13.6) (1.1) Operating cash flow per share (0.2) (0.2) (0.0) Tax expense $m Free cash flow per share (0.0) Minorities $m Price to free cash flow per share x nm Operating NPAT $m (14.8) (13.6) (1.1) FCF yield % (0.1%) 0.3% 12.6% 3.5% 7.1% Significant items $m (11.1) (0.5) Dividend Reported NPAT $m (25.9) (14.0) (1.1) Payout % GROWTH PROFILE F 2018F 2019F Yield % Operating revenue % n/a Franking % EBITDA % n/a EBIT % n/a (21.3) (105.6) 1, Enterprise value $m Operating NPAT % n/a (8.3) (91.9) (823.2) 45.1 EV/EBITDA x (18.2) (25.0) Normalised EPS % n/a (8.3) (91.9) (823.2) 45.1 EV/EBIT x (13.5) (18.4) DPS % n/a n/a n/a n/a n/a Price to book (NAV) x Price to NTA x BALANCE SHEET F 2018F 2019F KEY RATIOS F 2018F 2019F Cash/(overdraft) $m EBITDA margin % nm nm 13.5% 31.0% 33.3% Receivables $m EBIT margin % nm nm 2.1% 22.9% 26.5% Inventory $m NPAT margin % nm nm nm 18.9% 23.1% Other $m ROE % nm nm nm 12.9% 15.8% Current $m ROA % nm nm 0.8% 11.9% 14.2% Prop, plant & equip $m Net tangible assets per share Other $m Net debt /(cash) $m (7.0) (13.0) (25.1) Non current $m Interest cover (EBIT / net interest) x (0.4) (5.7) (7.8) Total assets $m Gearing (net debt / EBITDA) x nm nm nm nm nm Accounts Payable $m Leverage (net debt / (net debt + equity) x nm nm nm Borrowings $m Other $m DUPONT ANALYSIS F 2018F 2019F Total liabilities $m Net Profit Margin % (401.7) (128.4) (3.9) Net assets $m Asset Turnover x Equity $m Return on Assets % (36) (31.3) (1.5) Retained earnings/other $m (97.6) (111.5) (112.6) (104.6) (93.0) Financial Leverage x Shareholder's equity $m Return on Equity % (72) (126.4) (2.0) CASH FLOW F 2018F 2019F Key drivers 2017F 2018F 2019F EBITDA $m (10.1) (7.9) Volumes Change in provisions $m Internal production vol. (dom. & imp.) t Change in working capital $m 1.4 (3.7) (2.3) (5.0) (2.7) Direct NRM sales t Net interest $m (1.1) (2.8) (1.7) (1.7) (1.7) Toll NRM sales t Tax paid $m Total NRM sales t Other $m (5.7) 0.6 (0.0) Seed sales t 1,800 2,898 3,300 Operating cash flow $m (15.5) (13.8) (0.2) Prices Stay in business capital expenditure $m (9.9) (3.3) (0.7) (0.4) (0.1) NRM price USD/kg Acquisitions/divestment/other $m 2.1 (0.5) (8.0) Toll price AUD/kg Investing cash flow $m (7.8) (3.7) (8.7) (0.4) (0.1) Seed price AUD/t 1,389 2,143 2,143 Equity $m Domestic straw farmgate price AUD/t Increase / (decrease) in borrowings $m (4.8) 14.1 (13.0) Imported straw farmgate price AUD/t Dividend/other $m AUDUSD $ Financing cash flow $m AUD EUR $ Free cash flow $m (0.2)

3 TPE completes company-transforming capital raising TPE has successfully completed a company-transforming capital raising of A$44.2M, increasing its market capitalisation to A$171M at the TERP of A$2.34, while funding all publicly disclosed medium term growth initiatives. The raising is primarily to fund growth (c.a$31m), while also reducing current debt (A$13M). Details of the raising The raising was priced at A$2.20 per share, an 8.3% discount to last close, and a 9.2% discount to the 5-day VWAP. Having traded much of 2016 at an average c.a$2.90 per share, TPE s share price came under pressure after its 2016 result, where the company missed soft guidance of breakeven operating profit for 2H16. For 2017 we have hard guidance, published by the company with its 2016 results release, and signed off by a strengthened Board including Stuart Black (Non-Executive Director of TPE, NetComm Wireless, and Australian Agricultural Company, amongst others) and Simon Moore (previously Managing Director of The Carlyle Group, Non-Executive Director of Australian Agricultural Company). This guidance is for 55t-plus of NRM sales. Impact on forecasts The dilution to our 2018 EPS (we use 2018 as we don t forecast TPE breaking even at an NPAT level until then) is 20.8% - we had factored an A$20M raise, so some dilution was already captured. We estimate TPE will benefit from a gross interest cost saving of A$1.1M in 2017, or A$1.4M annualised, and we estimate 2017 period end (ie. 31 December) net cash of A$23.4M, assuming 62t of NRM sales, and that no payments for imported crop over and above the c.40t already guided are required. There are no other changes to our P&L for 2017/2018, other than the inclusion of an incremental c.a$0.3m pa of depreciation, as we make the assumption that the A$6M capex for Portugal and the A$2M for Australia is depreciated over 25 years, and interest costs for unrepaid debt. In terms of cash flow, we make allowance for an incremental A$8M capex in 2017, factoring A$6M in Portugal for TPE s API (active pharmaceutical ingredient) facility and A$2M in Australia for new harvesters, and further lab and general process efficiency investments. We model A$13M of current debt (the Washington H. Soul Pattinson facility) as being repaid and not redrawn in calendar Following the equity raise, we anticipate TPE pursuing refinancing options for this debt, to retain capacity for domestic plant expansion in 2018, while reducing its cost of funds. Use of funds Funds raised will primarily be applied to growth initiatives, as follows: Crop payments: A$15.0M is to be allocated to working capital for advance payments to farmers. This is interesting, because if you assume an average cost per equivalent kilogram of NRM of A$150 is paid to the farmer, this then implies capacity to purchase enough straw to produce 100t of NRM. We note 2017 guidance is for 55t-plus of sales, and that therefore the actual sales volume could be above 55t. It also means TPE might already be securing access to more than the c.40t NRM equivalent of imports. Debt reduction: TPE will repay A$13M of its A$23.5M facility with Washington H. Soul Pattinson, which was drawn to A$19.6M at balance date on 31 December We expect TPE to pursue bank refinancing options for some or all of this facility, given its expensive coupon of 11%. We anticipate TPE keeping some debt capacity in reserve in order to fund both the purchase of its Victorian premises and the expansion of domestic processing capacity in We now view TPE as fully funded. General working capital: A$8.2M has been earmarked for general working capital. We expect this to fund, amongst other things, developing API validation batches for the UK and Portuguese markets, and potentially some stock investment should TPE prove successful in its bid for a medical marijuana licence. 3

4 Portuguese facility: TPE has on prior occasions disclosed its intention to vertically integrate to produce active pharmaceutical ingredients (API). The company previously acquired an ex-merck site in Portugal for this purpose, and guided to a requirement for A$5-6M capex to build a 150t API facility. A$6.0M of the capital raising will be directed to this purpose. More generally, we expect TPE to move through validation with the various Portuguese Government departments during 2018 for first API sales out of that market in We will include API sales in our forecasts once TPE s product is validated. Coolaroo capex: a further A$2M of capex is to be allocated to general expenditure at the Coolaroo facility, although we understand the anticipated use is broader than this, specifically: new forager harvesters, to augment with TPE s IP protected scoops; investing in incremental process development at the factory to extract further efficiencies; laboratory and equipment in relation to medical marijuana research. Valuation We value TPE using a DCF-based valuation. Our valuation reduces on the dilution from the capital raise, from A$3.97/share to A$3.56/share. Prior to TPE s capital raise, our valuation already included an assumption of an A$20M raising. Increasing this to A$44.2M, at the deal price of A$2.20, adds an additional c.13m shares versus the 60.1m share count that we had factored into the DCF, so the incremental dilution is less than might otherwise be expected. Further, our DCF had factored a net debt position, being the balance at 31 December 2016 (net debt of A$27.5M). At A$44.2M raised, we now factor a net cash position into our DCF. Our WACC is 11.9% and factors the following: Terminal growth rate: 2.5%. Risk free rate: 5.25%. Equity beta: 1.4x. Equity risk premium: 6.0%. Cost of debt: 11%. Debt/equity: 30%/70%. In line with our valuation, we reduce our target price from A$3.90 to A$3.55, while maintaining our BUY recommendation. 4

5 Petra Capital Level 17, 14 Martin Place, Sydney NSW 2000 ABN ACN AFSL Director: George Marias +61 (0) Research (Industrials): Michael Henshaw +61 (0) Research (Industrials): George Kopsiaftis +61 (0) Research (Industrials): Nick Berry +61 (0) Research (Industrials): Killian Murphy +61 (0) Research (Industrials): Daniel Porter +61 (0) Research (Property): Jonathan Kriska +61 (0) Research (Resources): Brett McKay +61 (0) Research (Resources): Matthew Schembri +61 (0) Sales: Frank Barila +61 (0) Sales: Shane Gavegan +61 (0) Sales: Mark Innes +61 (0) Sales: Richard Macphillamy +61 (0) Sales: Vincent Pisani +61 (0) Sales: Michael Vincent +61 (0) Sales: Colin Redmond +61 (0) Sales: Daniel Gardiner +61 (0) Sales: Peter Veldhuizen +61 (0) Corporate (ECM): Conrad Anderson +61 (0) Corporate (ECM): David Wallis +61 (0) Administration: Krystle Garven +61 (0) Administration: Amelia Holland +61 (0) Administration: Samantha Tingley +61 (0) Administration: Silvia Fratta Pasini +61 (0) Administration: Larissa Falvo +61 (0) Legal & Compliance: Stephen Newton +61 (0) Financials: Tony Christelis +61 (0) Disclosure This document has been prepared in Australia by Petra Capital Pty Ltd which holds an Australian Financial Services License AFSL Petra Capital Pty Ltd is an ASX Market Participant. 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