GTP - Great Southern Plantations

[Julia]

Julia, Analyst,

Both of you should be congratuated! GTP is going lower and lower and lower ...

Thanks for that Jackob. Once I've sold something, I never look at the price again so as to avoid the syndrome of "oh, if only I'd waited.......", so it's good to have the decision reinforced.

Julia

 

[Jackob]

GTP ... rising sales and revenue ... rising profit and eps ... target price $5+...

not too many people seem to believe these any more.

 

[savtin]

Hi Analyst and other GTP Holders,

I am currently out of this stock until it settles and we get a better picture of where this is going. From people i have spoken to i have the following things to add:-

1. Some people are stating that their was no official "profit downgrade" made from the company, but from what i have been able to gather is that the comments from J.Young regarding "increases in costs" and lower profit margins and the impact from the revised accounting standards means that some have taken it as an unofficial profit downgrade from what some anaylsts had allowed for..........i mean the more than 180 % sales increases in income products will help.......

2. It is interesting because Macquaries equities had a Sales figure of $400 million and GTP will end up with about $450 million this should i believe nuetralise any downside from cost blowouts. Therefore the profit figure should still be a RECORD $150 plus so i don't know what the fuss is about.....

3. From what i understand,( now this is speculation and i will try to find out more) the.......real impact from changes to the land valuations to AIFS may affect the EPS badly.............some are predicting a downward revision to EPS which may mean that EPS becomes much less than the 45 cents per share flagged by analysts.............now afcourse last years results will have to be changed to but if for eg the EPS changes to say 30 cents or 25 cents per share then this may affect the SP outlook........... i am not sure but will definatley look into it.........

4. Until i can resolve some of the above issues i will stay on the fence....but i am getting withdrawal symptoms and want to get back in......but i need to get some answers first...

below is the report by Macquaries after the sales figures were released........


From Macquarie:

"Great Southern has announced non-timber managed investment scheme sales of $143m for 2006. This is up 180% on last year's $51m.

The company also stated that earnings per share growth will be "modest" due to a "substantial" increase in the cost base.

In other news, Australian Agricultural Co. (ASX: AAC) announced Great Southern has purchased Wrotham Park cattle station for $53.5m.

Impact

Sales strong. This sales result is strong. If timber sales remain flat on the same period in the previous year (current Great Southern expectations), total managed investment scheme sales will be $450m. We have upgraded our managed investment scheme sales numbers from $402m to $420m.

Earnings per share forecasts reduced. The earnings per share guidance makes earnings per share growth of approximately 5% likely. We had previously forecast 9.7% earnings per share growth. The continuing growth in the headcount and cost base of the business is concerning.

Cattle station acquisition increases capital expenditure. The acquisition of Wrotham Park now means Great Southern has purchased three cattle stations for $112m over the past two months. We had previously assumed limited capital expenditure for the cattle product, as most land was to be leased under original plans when the Environvest project was purchased last year. This change in strategy has affected cashflow.

In addition, we have increased our land price assumption from $6,000/ha to $7,000/ha, which adds $20.25m to the annual capital expenditure bill. This is mixed news for Great Southern, as the cashflow impacts are offset by the increased value of the landbank.

Second Government inquiry is a concern. This inquiry was announced at a doorstop interview by the Federal Agriculture Minister on Wednesday, and is focused on the potential distortionary effect the managed investment scheme industry has on traditional agriculture. The inquiry is concerning, as it is the second Government-sponsored inquiry into managed investment scheme this year.

Earnings revision

Earnings per share: 2006 -4.7%; 2007 -6.2% on increased overhead assumptions.

Price catalyst

12-month price target: $3.55

Catalyst: Improvement in free cash flow generation driven by land recycling, product restructuring and increased securitisation. Any tangible evidence that 2006 sales volumes are likely to be maintained at or above 2005 levels will be a major catalyst.

Action and recommendation

Reduced to neutral. Great Southern is likely to remain a volatile stock, given the concentration of sales in the month of June each year and the impact of factors outside the company's control. The rise in the cost base and capital expenditure is our major near term concern. "

These conclusions might be reasonable with a P/E of 15 or 20 but not with a P/E under 8. Too early to see how the cattle businesses are going to go

 

[michael_selway]

GTP ... rising sales and revenue ... rising profit and eps ... target price $5+...

not too many people seem to believe these any more.

Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS 41.7 45.9 54.0 58.7
DPS 14.0 14.0 19.0 18.0

was before

Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS 41.7 46.4 58.1 63.8
DPS 14.0 14.0 19.0 18.0

Downgrade to Neutral - target $3.55

The analysts have downgraded their recommendation on the stock to Neutral as they are worried about the increase in the cost base and in capital expenditure.

They expect the stock to remain volatile as many cost factors are out of its control and due to the fact that sales are concentrated in the month of June.

thx

MS

 

[savtin]

By the way ANALYST,
macquaries had downgraded the stock from an outperform(buy) to neutral.....just recently......

 

[TheAnalyst]

Below is part of an assignment i did this semester in Corp accounting that new IFRS challenges bring...


Volatility & Account Users
Lack of skills and knowledge on interpretation of new IFRS’s has created concern on whether for example an investment is a good or a bad thing with reliance on further explanations to complex reports and there interpretation.

With the adoption of the AASB’s now fairly mainstreamed in the use of retained earnings, it will not automatically cause the fundamental models that company shares are priced on to change without causing any real visible change in company share prices. Users of statements would voice their concern if volatility affected the values of their investments negatively.




Discussion of New Standards
Impairment

AASB 136 Impairment of Assets replaces AASB 10 Recoverable amount of Non-Current Assets. Entities are now required to test for impairment of assets held at either “cost” or” fair value”. An entity determines either external or internal applicable impairment indicators to measure an asset for impairment and if its existence is indicated the entity will measure the recoverable amount of the asset then recognise and measure the impairment loss and also reverse an impairment loss if relevant, as well as disclosing impairment information.

AASB 136 defines recoverable amount as the higher of ‘fair value (less cost of sale)’
and its ‘value in use’ AAS 10 defines recoverable amount as the net amount that is expected to be recovered through the cash inflows and outflows arising from its continued use and subsequent disposal. The new AASB 136 definition differs from the existing definition as it includes the fair value measurement in the calculation of recoverable amount. Also under AASB 136, ‘value in use’ must be calculated using discounting where as discounting does not have to be performed under the AAS 10 definition of recoverable amount. As ‘value in use’ will have to be discounted, this will result in a lower recoverable amount meaning that for-profit agencies will realise more impairment loss write downs.

An impairment loss on an asset valued at cost is recognised in profit and loss and is also an alteration to the deprecation account and in relation to an asset that has been re-valued is a decrement and can be offset against its particular asset revaluation reserve to the degree that the reserve is larger than the loss.

A reversal of an impairment loss in relation to an individual asset or cash-generating unit with impairment losses previously recognised need to be reversed where the recoverable amount has increased and is recognised in the profit and loss in the year the loss is reversed and cannot surpass the amount that asset would have been carried at had the asset not been initially impaired and written down as well as being treated as a revaluation increment However, an impairment reversal from the unwinding of the cash flow discounting due to the course of time is prohibited. In regards to a cash-generating unit loss reversal it is allocated on a pro rata basis to each individual asset, based on the assets carrying amounts and the lowest level of aggregation that generate largely independent cash flows.

AASB 136 states that a cash-generating unit is a group of assets that together produces output for which an active market exists. The former AAS 10 requires that the lowest level of aggregation for impairment testing be a class of assets. AASB 136 introduces the new concept of ‘corporate assets’. Corporate assets do not generate a separate cash inflow but are needed for the effective running of an entity. AASB 136 is more extensive than AAS 10 in determining when an asset should be included in a group of assets for impairment testing. Paragraph 2 of AASB 136 also sets out assets that are exempt from application of the standard such as inventories, biological assets, deferred tax assets etc however standards covering these do contain some impairment requirements

 

[TheAnalyst]

Reduced to neutral. Great Southern is likely to remain a volatile stock, given the concentration of sales in the month of June each year and the impact of factors outside the company's control. The rise in the cost base and capital expenditure is our major near term concern. "

These conclusions might be reasonable with a P/E of 15 or 20 but not with a P/E under 8. Too early to see how the cattle businesses are going to go quited from Satvin Macquarie downgrade to nuetral

Its not concerning seeing mac had a sell on it a year ago...then a buy and now a neutral all because they cant get it right......lucky it aint SEN or else it would be really gone hehe....u may find that macquarie's controlled subsidiaries and associated entities have been accumulating....

 

[Jackob]

Below is part of an assignment i did this semester in Corp accounting that new IFRS challenges bring...

... Users of statements would voice their concern if volatility affected the values of their investments negatively. ...

Analyst,

How could we shareholders voice our concern if volatility had already affected the values of GTP shares by AIFRS?

The GTP headquarter told me over the phone that under AIFRS the total value of the land for new projects will be written down by 60-90% and that this loss will goes into the 2005-2006 FY Profit and Loss Account.

So IMHO how much profit would be left in the account is only a matter of everyone's imagination.

How can we complain? And why doesn't GTP complain?!

 

[TheAnalyst]

Analyst,

How could we shareholders voice our concern if volatility had already affected the values of GTP shares by AIFRS?

The GTP headquarter told me over the phone that under AIFRS the total value of the land for new projects will be written down by 60-90% and that this loss will goes into the 2005-2006 FY Profit and Loss Account.

So IMHO how much profit would be left in the account is only a matter of everyone's imagination.

How can we complain? And why doesn't GTP complain?!

Hi Jacob

That does not make sense that the land will go down by 60-90%....if they just bought the land how does it go down immediately??? Could you please explain a little more....as what I am saying is that once investors realise that these book entries are just that book entries, then users of reports will realise that this type of entry is not the type of entry that should be regarded in the valuation and measuring of profit......it has now become quite complicated and shows how dreadful the Australian Accounting Standards Board behaviour is...meaning that company financial reports should be able to be read at least by a user with some knowledge but now they have implemented a procedure that users without degrees and relevant qualifications will have to rely more heavily on those who have the qualifications unless of course like yourself you have the experience to interpret what has happenned.

I am starting to be inclined that GTP took a drop because of the shift to september to be the end of its finacial period or year.

 

[markrmau]

Hey gtp holders. Take your tax losses (or gains if you bought at right time) and jump into FEA.

Results are going to be an absolute cracker

 

[watsonc]

Why will results for FEA be a cracker??? There was a substantial buy in on the 6th of june!

 

[Jackob]

Hi Analyst,

The value of all lands newly leased to investors will be written down by 60-90% under IAFRS due to their status of encumbrance, or say because the lands will be occupied by the investor for 10-20 years and will not be available to the owner for any other uses or for sale.

Say a block of land worth $1000, and it has been leased out for ten years, so this $1000 amount of money will only be available to the owner in 10 years. Thus the present value of the land according to IAFRS should be calculated by the method commonly known as "discounted cash flow". Assuming the discounted rate is 9% p.a., the present value of the land would be $1000*(1-9%)^10=$389, or say totally discounted by 61.1%.

On the other hand, during the whole lease period, the "present value" of this piece of land will grow by 9% pa, and at the end of the 10-year pereod, the full value will recover.

Disclaimer: I am no accountant and the above understanding/calculations may be totally wrong. I disclaim any responsibility to them.

 

[pch]

Thats exactly right Jackob and painful though it is, it is probably a fairer reflection of the true state of the asset anyhow.

But what cannot be ignored is this land that GTP own will be a major strategic asset in the future. Its not something that a competitor can simply jump in on, as it is a finite resource. (So, making a dodgy comparison to Engin for a second, anyone can produce a VOIP box - but you can't just produce thousands of acres of prime agricultural/plantation land).

As a long term play (and i don't sell anymore cos my market timing isn't that great), I think those assets, and the ability to extract revenue and profits from those assets should not be underestimated.

In the short term, who the hell knows how low it will go In some ways, I think of GTP as an investment in land, not a stock.

By the way, where did you pull the discount rate from? Is that based on the expected appreciation of the land value during this time period?

 

[Jackob]

Hi pch,

The 9% p.a. discount rate was just pulled out of from the top of my head! : But it matches the 60-90% total discount range given by GTP (if the project life period is 23 years then the total discount would be close to 90%).

A bit more seriously, this discount rate should be about the same used in the "Discounted Cash Flow" (DCF) method to calculate share prices. It should be a bit higher than the interest rate of the company loans. Last year GTP's TRESS-3 bears a 7.75% p.a. interest, so a 9% discount rate sounds OK.

Just as you said this discounting calculation is probably a fairer reflection of the true state of the assets. People certainly agree - so why we are now having it. In an extremely long-term (10 years at least I reckon after GTP stops growth) the written-downs and written-ups of the land value can be cancelling each other, but in the short term, the effect would be horrendous.

Disclaimer: I am no accountant and the above understanding/calculations may be totally wrong. I disclaim any responsibility to them.

 

[pch]

I use 11% as my default for stocks to be on the conversative side and go as high as 15% for the higher risk stuff on the advice of a learned friend

But what the formula doesn't outline is that the original $1000 asset has appreciated in value and in 10 years may be worth $1800 and not the original $1000.

I would think that this would improve the NPV but since you can't predict future land values with any certainty, I assume they would revalue the land each year, and therefore although the first year sucks, it may well improve quicker than your example?

Makes the formula a little more complex doesn't it.. But at least we as investors can make assumptions on future land value and assume the increased sell price when doing the NPV calculations.

Damn its times like this I wish I had an accountant in the family..

 

[Jackob]

Hi, pch,

I am a bit surprised to know that the rural land value could increase by 80% in 10 years, or 6% p.a.! If as you said the DCF discount rate should normally be 11-15% p.a., then I think it is possible that the 9% p.a. discount rate for the new land has take the land revaluation into account already. For the old land, the revaluation under IAFRS then should be (9% + the land price increase rate) * its “present value”.

I am also not too certain how to view the role of the land value increase played in GTP’s value. I understand that all property prices are ultimately determined by the profits they can make each year. Say a house price is largely determined by the rent it collects. If the rent increases then the house price follows. In the case for GTP, the total revenue is the sale of the MIS schemes, of which the price never changes (E.g., for a woodlot of pulp-trees the price is always $9000 in the past maybe 10 years). At the same time, the costs increase. Thus the net effect is a profit reduction. So although the market value of a piece of land is increasing, the operational value to GTP is decreasing. Unless GTP goes bust, it can never sell the land, and hence the increased market value is nothing to GTP.

 

[pch]

Hi again

I pulled the value appreciation figure out of you know where But I was more trying to determine how one takes into account price increases of the land. Your reasoning is sound and a good conservative view on the net decrease in profit but I guess we also need to take into account that such land we are talking about is becoming more and more difficult to source, and this is one of the problems that GTP and the whole agribusiness industry faces. So like any finite resource, over time this would have upward pressure on its intrinsic value..

You never know - in the future GTP might be whacking on biodeisel crops if its more profitable than pulp for paper

This may be over simplistic, but hey, my uncle owns a couple hundred acres around Dunsborough/Bussleton in WA. 30 years ago when he aquired it, people thought he was mad, now he is a very rich hillbilly having carved it off and sold it bit by bit since

One thing is for certain though that the sort of asset we are talking about is a lot more unlikely to reduce in value the same way that plant or excess inventory depreciates over time.

I guess my point was that since you can't predict the rate of increase, then the next best thing is to re-value the land each year and then adjust your discount rate by a certain margin?

 

[Jackob]

Hi pch,

IMHO, the long-term house price growth in big cities is largely determined by the growth of rents, which is in turn determined by the growth of average income of the tenants. The real average income growth (inflation excluded) in Australia is about 2% p.a. and the inflation is under 3% at present. So a 6% p.a. growth in value would be very good even in city area in a long term. And I doubt the rural land price would have the same growth rate. (I reckon the rural land price growth is determined by its productivity growth.)

On the other hand GTP now bought all the new properties on bank loans. For example, J Young said in his recent open briefing that GTP would have $200m bank loans to buy land for this year's pulpwood projects of $~300m, and have $250m loans for the income projects (grapes, olive and cattle) of $~145m. The interest on all these bank loans should be at least 7% p.a. (last year's TREES-3 bears an interest of 7.75%).

So even if the land value increases by 6% p.a., it would still be a net loss after servicing the loans.

 

[TheAnalyst]

Hi Jacob

I will appreciate your attention to detail and your application of fundamentals and the new IFRS,s in regards to the the profit and loss statement of GTP......you must also note that gtp is in receipt of lease revenue as the opportunity cost for giving up their right to use their own land.....also under IFRS,s impairment is looked at each year....so the each year of devaluation should be reversed each year and come back thru as profit. Could you please tell me what new AASB under the new IFRS,s that you are quoting in regards to the write down of land???

thx as i would like to have a look at that myself.

 

[Jackob]

Hi Analyst,

I am not an accountant at all and my knowledge in accounting is limited.

The main concern of mine at present is all about the impact of AIFRS (Australian equivalents to International Financial Reporting Standards) on the GTP profit and loss account, which has been hinted in the GTP announcements a few times since its 2005 Annual report (if my memory is not wrong).

I quote what JY said in his recent open briefing as follows.

“corporatefile.com.au
You flagged last year that one of the biggest impacts to the company of AIFRS is
the carrying value of plantation land. How will these changes affect your FY06
results?

“MD John Young
We own the majority of the land used in our plantations project which we regard
as an investment that will increase in value over time. Under the new international
accounting standards our investment property land is required to be recorded at
fair value, and this value needs to reflect the encumbrance of the lease given to
growers and the deferral of rental streams.

“This AIFRS accounting treatment will add a degree of volatility to future earnings
as an accounting loss is expected to be booked when the land is first leased to
growers. This loss, however, is expected to reverse progressively over the
following years as the lease term reduces to expiry and the land becomes
unencumbered again.

“In any financial year, assuming no major changes to the assumptions underlying
land values, the net impact on earnings will reflect the expected initial fair value
accounting loss from land leased that year to growers and the expected accounting
gain in fair value of the opening land bank at the end of the year, as the leases to
investors will be one year closer to expiry by the year’s end.
For FY06 we expect the net impact to earnings from plantation land accounting to
be a loss as during the year we acquired a large amount of land and leased it to
investors. This expected net loss impact on earnings is accounting in nature and is
not a cash outflow.

“In the future, given that we expect to hold new plantation sales at around current
levels, we expect the net impact to earnings from AIFRS accounting for our land
to become earnings positive. The size and value of our land bank is expected to
increase to a level at which the accounting gain arising from the leases that are
closer to expiry at the end of the year should more than offset the accounting loss
arising from land which has been leased to new growers.” (END OF QUOTE)

As I mentioned before that the GTP headquarters said the value of land used for the new projects would be written down by 60-90%, from which I worked out the annual discount rate of about 9%.

Using this rate, if we know the acreages of the new and old lands, then we can have a rough estimate of the AIFRS impact on GTP’s earnings. I would like to give a fictitious example for this calculation on pulpwood projects as follows.

If say this year GTP has spent $20 million to buy lands for the 10-year pulpwood project, then this $20m of land value would be written down by (1-9%)^10 = 61.1%, that is $12.2m. On the other hand, GTP has old lands for the pulpwood projects of previous years, which might be worth say $60m. Because most of the old lands were acquired in recent years, so their "present value" might be around $30m. Assuming the land market value of land increased by 10% in the year, the total appreciation will be (9+10)% of the $30m, which is about $5.7m. Combining the loss and gain together makes a total loss of 12.2-5.7=$6.5m.

Analyst, hope the above would help.

Cheers.

Disclaimer: I am no accountant and the above understanding/calculations may be totally wrong. I disclaim any responsibility to them.