Hi all GTP holders please find below a great article on the company released recently,
Australian Money Trees, Part II
The Rude Awakening
Wall Street, New York
Joel Bowman, reporting from the chilly woodlands of upstate New York...
Yesterday, in part one of his report from down under, Steve Sjuggerud introduced you to an amazing investment idea that gave new meaning to the old, "money doesn't grow on trees," adage. If you missed the first installment of this you can check it out at:
http://www.howestreet.com/articles/index.php/daily?article_id=2073
We return to the sun burnt land today where Steve pulls the figures together and shows you why investing your greenbacks in green trees might not be such a bad way to go. Actually, you could stand to make quite a healthy return. Read on below for today's Rude Awakening...
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Australian Money Trees, Part II
By Dr. Steve Sjuggerud
In yesterday's Rude Awakening, I introduced you to a very unique timber investment. An Australian company named Great Southern Plantations (GTP.AX) buys timberland, then sells interests in the timber harvests to individual investors. Once the harvest occurs, Great Southern replants and sells the next generation of timber harvest to a new set of investors. It's a terrific business model...and one that benefits from some very sizeable Australian tax breaks.
For reasons that I explained in yesterday's column, Great Southern's shares were obliterated back in 2001-02, but have recovered nicely. The company's sales have recovered dramatically too.
From A$50 million in fiscal year 2002, sales at Great Southern grew to A$300 million in FY2005. Sales in FY 2006 could easily exceed A$400 million. And as financial planners that have just been added to the sales force get going, FY 2007 could see sales of A$500 million.
For a company experiencing this kind of growth, you might think these shares would trade at growth-stock prices. You'd be wrong...
The consensus estimate of earnings from analysts in Australia for next year is A$0.57 cents per share. At a share price of A$3.50, that puts the P/E of Great Southern (based on analyst estimates) at about 6. Man that's cheap!
Great Southern pays out a nice dividend too, in the 5% range.
The sweet spot for Great Southern really gets going in 2009. I say this because this is when the big "rollovers" start to happen with existing timberlands. Right now, Great Southern's cash flows aren't great, because they still have to use the cash coming in to buy timberlands.
But by 2009, they'll have about 20,000 hectares a year rolling over... that's 20,000 hectares of land they can "resell" at no cost to them.
At the moment, business is almost too good... Great Southern is able to sell more investment products than it has available land. So it's been borrowing money (by issuing what are basically convertible bonds) to buy chunks of land.
Great Southern has acted opportunistically. At this moment, I'm writing to you from Margaret River, Western Australia. On my way down from Perth, I passed winery after winery. This is wine country.
Great Southern has used the proceeds from these convertible bonds to acquire some existing vineyards and cattle lands. They can package and sell these as investments similar to their timber deals, with returns coming to investors much quicker than with timberland. This also diversifies Great Southern, so that it doesn't have to always rely on timberland.
The biggest concern to me with this company is that it continuously issues convertible bonds to buy new properties. This process will "dilute" the shareholders. Of course, if these borrowings create value above the cost of capital, the dilution is no problem. But there's one thing that makes me comfortable enough to recommend Great Southern... and that's John Young's stake...
John Young owns nearly 50 million shares of stock (out of the 300 million shares outstanding). So he personally owns about one-sixth of the shares. As of the latest annual report, John owned no convertible bonds.
John Young is a Big Cheese at Great Southern, the Managing Director. The last thing he'd do is dilute his own wealth by issuing any more convertible bonds than are absolutely necessary to run the business properly. So while I have concerns about future dilution of shareholders, I know that John Young will be looking out for his own shares, and will do his best to limit hurting his own wealth.
Looking at the valuation, Great Southern's timberlands were independently valued in June of 2005 by the highly- respected real estate firm CB Richard Ellis at A$620 million. As of its latest balance sheet, Great Southern had about A$120 million in cash. So in just earth and cash alone, you're looking at almost A$750 million in value. Yet the stock market value of Great Southern as I write to you is A$1 billion, which is about $750 million in U.S. dollars.
Beyond just the land and cash, you've got the portfolio of investor loans (paying Great Southern 12%), you've got Great Southern's loyal customer base (60% of Great Southern's 30,000 customers in the latest year were repeat customers), and you've got Great Southern's distribution base of 5,000 financial planners.
Remember, the investment product Great Southern sells is irresistible to individual Australian investors... It gives the average investor a generous tax benefit immediately, AND it provides them a nice return on investment in ten years time (I wish we had things like this in the States!) It's also irresistible to financial planners, as Great Southern pays out large commissions.
Great Southern can practically grow as fast as it wants. Remember, the big profits will start to show in 2009, as larger tracts of land are able to be resold. Since Australians are still skeptical of these tax-related things, I think the shares are a bit hated. For now, Great Southern is cheap at a forward P/E of 6 and paying a dividend yield of 5.3%. But the uptrend since 2002 is clearly in place.
All this is well and good... But it's not the important thing. The important thing is the ever-increasing pile of timberland that Great Southern gets paid every ten years to hold and increase. That is the jewel.
Remember Otto von Bismarck: "Investing in paper securities was a fine and quick way to get richer, but the repository of true wealth should be land on which you could grow trees."
With Great Southern, that's exactly what we get.
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