We started with a system I call caged trees, where each supporting shade tree received a 1m high ring of wire fence, which we filled first with coconut husks and then cocopeat.  The vanilla thrived at first, so our second major method of a raised bed filled with cocopeat was not repeated after the first trial in Garden 4.

However, after two years the caged trees stop growing.  The raised bed trees keep going.  So we changed to the raised bed system, which when you think about it makes far more sense, because it has massive capacity for a huge root system.

The value of the company is of course the assets, our gardens, and there we have difficulty.  Normally, a company buys an asset and values it at the purchase price.  According to accountants.  So our gardens are worth what we pay to rent the land, the cost of the young plants and the compost and materials.  Which is very little.  Certainly nowhere near what we would accept for a sale.

Recently, there has come about a valuation known as the Discount Cashflow system, whereby you calculate the likely income over the lifetime of the asset and discount it.  This also doesn’t work for us, because first our way of growing means the vanilla is eternal, always producing, and secondly we cannot confirm the annual yield or the price of the vanilla.

When a company is sold, it can be valued at the profit for the next five years.  I thought I would do a calculation more along these lines, as it gives us a reasonable result, not too excessive and still conservative enough to calm my doubting self.

Here is a listing of our gardens, our assets, with the following assumptions:

1. We expect to harvest one kilogram of dried, fermented vanilla per vine. This is based on an expected yield of 5kg per vine green beans. North Bali and Madagascar expect 2-4kg, in the hills around us the farmers claim 10-12kg.  Our experience with raised beds means we expect to be closer to the hill farmers than Madagascar, and we are happy with a forecast of 5kg, of which we are getting 90% in the Grade A range, so we can work on that price. When we process the vanilla, we are producing vanilla at 20-30% moisture, so even 4kg will produce 1kg processed, all at Grade A with at least 20% at our super grade, Royal Twenty.

2. We anticipate getting at least $100 per kilogram. Current price is $250.  We expected it to fall in October with a bumper Madagascan crop, but early reports are the famine there is affecting the crop, so maybe the price will rise.  We expect, and has been confirmed by some buyers, that we should get a premium price because of our Royal Twenty grade, we are organic and our Fair Trade principals.  So valuing our crop at $100 is beyond conservative.

3. Our costs are primarily rental costs, because where we can we agree to pay the landowner 20% of the crop value. In the early days before we had a track record, we had to agree to 50% for small gardens.  We have rented land outright, where a farmer was in desperate need for cash, but generally we prefer to work with the farmer because that is the easiest way of getting money into the village.  Our Fair Trade.  Processing costs are down to our employees, so are part of our overhead and don’t come into this equation.  If they did, it would be less than 5% so it is immaterial compared to the discount we have made on the expected price.

Gardens 8 and 9 are planted to fruit trees, mainly avocado, as too steep for vanilla.  6 and 7 are still caged trees, all the others are now raised bed.

Note that the asset value over 5 years, at half the expected sales price, is nearly $20 million.  Yet we have it down in our prospectus at $5 million.  And any half-way decent MBA would use the 10 Year value, which says our assets are worth over $100 million dollars.

That means your shares are worth ten times what you paid for them already!!!  If you have an MBA, of course.

We are continuing to be conservative, otherwise we would be selling the shares for a great deal more!

REX SUMNER

Chairman Royal Spice Gardens