GTP - Great Southern Plantations

[pch]

pch,
I reckon the 2 sides of opinions in the press are about equal (if the negative views are not prevailing), but as the newspapers, similar to the brokers, usually only put good words to stocks, thus the negative views in press deserve our more attention.

Yes absolutely agreed.. even more so with forums where the ramping and adulation is beyond a joke.. So long as people give *facts* positive or negative I find both sides of the story useful.

I never got back to answering you on the debt vs equity thing where you saw it the same. I consider this way. The WA govt is setting on a mammoth surplus a couple billion I think.. Yet major infrastructure funding like the new railway south is funded over some 30 year period. The argument is that its only fair that the burden of paying off this assett is not just paid by current taxpayers but those that will gain the benefit from this major spend in the years to come.

I kind of look it the same way with debt vs equity (esp when the share price is trading at low PE). If its an equity raise, then current shareholders can get hammered via the dilution when new shares are issued.

If the company takes on long term debt, then the 'shareholder penalty' is spread over the life of that debt.

Its of course not that clear cut, but I think this is an issue for GTP. If GTP were on a PE of 16 then I wouldn't be too fussed about then issuing equity

 

[Jackob]

I kind of look it the same way with debt vs equity (esp when the share price is trading at low PE). If its an equity raise, then current shareholders can get hammered via the dilution when new shares are issued.

If the company takes on long term debt, then the 'shareholder penalty' is spread over the life of that debt.

Say a company raises 10% new equity, then the e/s will be reduced by about 10%. This deduction will not only affect the current year's e/s, but also all e/s of future years. So the future shareholders can't escape the bad effects of equity increasing.

By the way, for a good company, equity or debt raising won't much affect profit margin and often e/s positive. This is because the extra money raised will make more and more money. For example, after an equity/debt increase to acquire North Plantation in 2001, GNS (GUNNS) doubled its e/s in the following year. The ongoing GTP's large scale equity/debt raising has dramatically reduced (diluted?) its profit margin and dramatically increased its debt/equity ratio to a critical level only indicate of its present very difficult financial situation.

 

[pch]

I think that the asset you are buying is what makes or breaks my argument. If you issue capital to take over an existing company that has existing revenues, compared to buying an asset that does not return cashflow immediately and the value of the asset cannot be realised immediately, I think the debt option is better..

GTP's issue is exacerbated by AFIRS trreatment of the assets they are buying where they have to discount it by encumbrance of existing leases and the like.. In the previous regime, I think the D/E ratio would be lower as a result..

 

[Jackob]

I think that the asset you are buying is what makes or breaks my argument. If you issue capital to take over an existing company that has existing revenues, compared to buying an asset that does not return cashflow immediately and the value of the asset cannot be realised immediately, I think the debt option is better..

Debts may not have an immediate impact on share price, only if people may not be fully aware of them immediately. GTP raised $412M debt in the 3 months of JUL-SEP 2006 and the debt/equity ratio shot up from 20% to 90% but many shareholders may not be aware even now! But the share price has to come down later or sooner.

 

[Jackob]

In an after-hour announcement today (6:45pm), GTP announced a new Management Performance Rights issue of 3,245,000 options, expiring on 20 December 2011, exercisable at $0.00.

The announcement said this rights issue was "approved at General Meeting of Members on 29 September 2004."

At present GTP share price near $3, isn't it a real $10 million robbery from all the shareholders?

 

[pch]

At present GTP share price near $3, isn't it a real $10 million robbery from all the shareholders?

I would agree with you if its a crap performance hurdle.. I don't have time to dig today. Any idea what they have to do before they can cash it in?

 

[Jackob]

God knows what sort of thing has been written in the 1-page "Results of General Meeting" "approved at General Meeting of Members on 29 September 2004"! God knows!

That document in the AXS website is strangely not available for reading at present!

 

[pch]

The govt press release..

http://assistant.treasurer.gov.au/pcd/content/pressreleases/2006/097.asp

one of the many media spins..

http://www.news.com.au/heraldsun/story/0,21985,20972707-664,00.html

"The only change is that at least 70 per cent of invested funds must be used to generate new plantations.

In future they will not be able to claim a deduction on fees and commissions paid to the promoters of MIS schemes. "

Jackob whats your take on the MIS scheme review. Seems to me that the outcome this time round is a big yawn but they will be scrutinizing the much more exotic things (ie non timber) early in 07..

"While tax breaks for tree planting can be sold politically in this era of global warming, the same argument hardly applies to myriad other tax-saving agricultural investments.

Grapes, tomatoes, beef cattle, almonds, strawberries and -- would you believe -- pearling off the coast of far northern Australia have been variously sold to city folk as tax-effective investments. "

I don't think that cattle would cause too much of a problem for GTP but grapes? I also wonder how hard TIM will have to fight for the tax breaks it enjoys for mango, avocado and almonds?

 

[Nicks]

In an after-hour announcement today (6:45pm), GTP announced a new Management Performance Rights issue of 3,245,000 options, expiring on 20 December 2011, exercisable at $0.00.

The announcement said this rights issue was "approved at General Meeting of Members on 29 September 2004."

At present GTP share price near $3, isn't it a real $10 million robbery from all the shareholders?

Be nice to know on what grounds they are entitled to this for.

 

[pch]

Be nice to know on what grounds they are entitled to this for.

Yep, so I went and had a look.. Some detail on this and other stuff below. I delved into the Sep 30 report for a completely different reason, but some stuff I felt should be noted here for discussion.

My good friend Jackob quite rightly pointed to GTP's high debt to equity ratio so I had a look at this. He quotes 90% which looks to be the borrowings of $615 mil against equity of $682 mil. So I took a look at the overall position including long term debt, and a couple of things are noteworthy.

They always seem to have deferred revenue listed in liabilities. This year its $150 mil. This is revenue received that cannot be recognized until the project its related to is started next year.

They have $45 mil in provisions, a lot of which is propping up crappy projects in 1996. here is the note on this.. judge for yourself will happen again?..

"The first three year’s projects, being the 1994, 1995 and 1996 Projects do share some common characteristics, in that they were the first of the Group’s plantations projects, management was outsourced and processing is to be completed through an independent contractor for a fixed fee based on relatively low throughput volumes and additional resource had been previously acquired for possible use in the projects.

It is the board’s current view that no consideration will be given to incurring similar expenditure for the 1997 or subsequent projects."

My original reason for taking a look at the balance sheet however was this new 70% rule. Where "investors in forestry MIS will be entitled to immediate upfront deductibility for all expenditure provided that at least 70 per cent of the expenditure is expenditure directly related to developing forestry (‘direct forestry expenditure’). Direct forestry expenditure comprises:

(a) expenditures associated with planting, tending and harvesting of trees at any time over the life of the investment; and

(b) annual costs of the land used to develop forestry, whether that be effective rental costs or lease payments for land. "

My concern was that my 2009 and onwards, GTP will require much less capital expenditure for land as they will start to rotate their existing assets. This would translate to a much improved profit margin by then. How would this impact the 70% rule though?

I am still not sure of this, but I suspect that definition b above covers it. GTP will charge a rent at market rates and the growers will be able to still get their tax deduction. I assume provided that the rent charges are demonstrated to be at market rates they should be okay, but I will seek clarification on this.

For what its worth, there was another quote from the report that I found interesting.. First up the justification blurb for their aggressive land aquisition program.. (I've cut out all but the important bits)

"The strategy of purchasing rather than leasing the majority of the land required for the Group’s plantation projects has a number of benefits, including:
It provides Great Southern with long term asset stability,
Great Southern benefits from the capital appreciation of the land, which is generally prime agricultural land in higher rainfall areas near to ports,
The land will be available to continue to raise revenues after the conclusion of the projects. This will then significantly increase free cash flow as revenues will be generated with no capital expenditure required for land purchase, and
Ownership of land provides security of tenure to investors, as well as a level of assurance to purchasers of the end products (woodchip), who are looking for secure long-term resource supply."
[snip]

then this..

[/I]"The land is expected to produce significant future cash flows to the Group in the form of lease rentals charged to growers, new arrangements entered into with investors and possibly its eventual sale."[/I]

Sale? I never considered that.. but hey if shareholders can get a better return from selling the land after a decade.. hmmm

And finally, Nicks, in relation to the performance bonuses, they remind me of an active managed fund (and thats not a good thing). Basically, if they do better than the average total shareholder return of the S&P/ASX 200 Industrials Accumulation Index, the directors get their bonuses. This is slightly simplified, but here's the deal..

Below 51st percentile Nil
51st percentile 52% of Rights exercisable
75th percentile 100% of Rights exercisable

So even if the overall index goes negative, so long as GTP are slightly less negative, they get their bonuses

I don't know the date ranges either (its probably buried in there somewhere) - I just hope that the timing of this new issue is based on an anniversary than an opportunistic issue based on a recent crappy share price performance making it the performance goal easier to achieve

 

[Jackob]

Pch,

Thanks for digging deep into the issues.

1) Performance bonus rights.

I still can’t read the GTP announcements properly in the ASX website. I could only once read the GTP relevant announcements and see that a 2004 special general meeting approved issuing 12,500,000 options to Cameron Rhodes (Executive Director, General Manager) in the following 3 years under certain constraints you have quoted

Below 51st percentile Nil
51st percentile 52% of Rights exercisable
75th percentile 100% of Rights exercisable

Not sure whether these conditions is applicable to share price performances 1 or 3 years prior or after the issuing.

Don’t know whether this years 3,245,000 options were all to C. Rhodes and why it was at such an amount. Didn’t find similar options GTP issued in the past 2 years (or I missed them).

2) The new 70% requirement on “direct forestry expenditure”.

To understand GTP’s income and expenditure in its annual report, we first have to understand that the whole GTP’s pulpwood project “income” is all the upfront lump-sum payments of the projects in the 11-year life-span, of which the growers have only paid 10% deposits by the end of the each FY (30 June). So the 90% of the money are not real cash at all by that time. However, all the commissions to financial advisors, all expenditures, profit, taxes, interest on debts, dividends, … in the very same financial year are all generated from this fictitious money. And you guess where the money is from?

There is no doubt that GTP’s real “direct forestry expenditure” is well above 70% of the revenue. Say last year GTP got ~$300M revenue from woodchip project and ~$150M from the non-woodchip ones – a total revenue of ~$450M in FY 2006. At same time in order to establish these projects, GTP raised about $400M+ new bank debts in 2006. At a moderate rate 10% p.a., the total interests of the debt in 11 years will be $440M, which will wipe out nearly 100% of the whole revenue, let alone the money needed to pay the commissions to financial advisors, all other expenditures, profit, taxes, interest on the old debts (TREES-2/3), dividends… And would you guess again where the money could be from…

I have got the question for a long time: How could GTP raise $400M+ bank loans to generate $450M revenue, then spend them all, and still be able to claim a $170M+ “profit (be fore tax)” in FY2006?

I reckon it is the high time now to let GTP tell us the TRUE cost and profit (if any) of the woodchip (and other) projects in their whole life cycles. And I also reckon this is the ultimate purpose of the government new regulation.

 

[reece55]

Jackob
Have another look at the financial's - the $400 Mil in extra borrowings was not all new - about 300K of this was used to refinance Current Payables and existing current financial facilities. So, realistically they actually just converted some debt that was due and refinanced and increased net debt to about $100 Mil. I note that they also have hedging in place for interest now, so obviously their treasury dept. is in gear. The provisions question however is an interesting one - those projects from 94 -96 yielded such bad returns for the investors that GTP felt they had to subsidize them (well, thats my understanding anyway)...... I wouldn't be knocking the model however - most of the 90% portion of the investor loans are all off book - securitised by a bank (Adelaide Bank ). So there is actual cash flow from the bank, to GTP, to investors, etc.etc. The added benefit from the securitisation process is that they are non-recourse loans to investors - i.e. the only security is the plantations themselves, so GTP has no exposure. The best thing about the whole system is the NPV effect - if you can save 46.5 cents in the dollar now on tax for investment elsewhere, you don't need a large return 11 years down the track for it to have been beneficial to you. Certainly there are some questions on the sustainability of their model, but I would have to say that their current earnings are probably ok!

Cheers
Reece

 

[Jackob]

Hi Reece,

Thanks for the comments. But I have to dig deeper into GTP’s accounts.

A short history of GTP’s debts in the last 3 years is as follows.

05/10/2004 - - TRESS-2 $80 M
22/09/2005 - - TREES-3 $120 M - - - - Total $ 200 M
(by) 30/9/2006 Bank debt $412 M - - - Total $ 612 M

The newly obtained debt in the FY 2006 (1/7/2005 - 30/9/2006, extended by 3 months due to the change of FY period) is actually $120M (TREES-3)+$412M=$532M. Before 30/6/2005 the only debt GTP got was just $80M TREES-2 with no bank loans at all. The $245M refinance (on 15/9/2006, drawn to $200M at 30/9/2006) was for “existing cash advance and hire purchase facilities”, which all happened during the FY 2006.

By 30/June each year, what the growers have paid is only 10% deposits on the 11 year woodchip project. It’s impossible that any securitisation can be done on the rest 90% of the unpaid money by the same date. But GTP always take the full 100% amount as its “income” in its Income Account to pay off all its expenses, such as the commissions to financial advisors, office expenditures (including JY’s $1M+ income!), interest on debts, taxes, and generate a big “profit” and dividends, … in the same FY ending 30/6.

I have no doubt that such a GTP model will not be sustainable even if there weren’t any government regulatory changes, but the upcoming new 70% on tree husbandry requirement would certainly reveal more of the nature of GTP’s account practice.

Cheers!

 

[pch]

Hi Jackob

Its obvious by now I'm no accountant and god my maths is crap so I asked a friend who holds a lot of GTP and this is the gist of his response..

Money from investors in allotments is not income. The investors are creditors and have effectively lent money to GTP to plant trees. Here's a simple example based on $10k..

GTP gets paid $10K from investor. They've got $10K in the bank and a $10K creditor. They do something worth $1K (plant trees, soil treatments, management fee, whatever...). They've got $10K in the bank, $9K creditor, have earned $1K (income)
Over the next ten years they earn $1K a year, gradually diminishing the size of the creditor. until finally they aren't a creditor any more and the $10K now belongs wholly to GTP.

During this time, GTP declared $1K income each year for 10 years as opposed to $10K income in year 1 and $0 income in years 2 - 10.

CASHFLOW, was $10K in year one followed by 9 more years of negative cashflow as they spend the money but cashflow is not INCOME.

At the end, GTP sells the product for the investor (with a last management fee I assume)

I know that the example is way too simplistic and the timeframes and numbers are unrealistic, as well as not taking into consideration that GTP also lend money to the creditors, but it does demonstrate that present declared income is based around the previous years of projects and not all of the present FY..

 

[Bongo_Boy]

Hello PCH,

my level of maths is probably lower that yours.

but wouldn't great southern's revenues (incomes) have been much less if they were only recognising 1/10 of the investors money for each year, especially when they first had their big jump in revenues ?

I know this company seems to defer about 40% - 50% of revenue to the next year but it seems to reflect the money they are taking over a 12 month year.

Also i think the 12 month rule only allowed deductions on the money invested if it was ALL used in the following 12 months.

Hopefully all of the timber companies will settle down now that the government has sort of made it's decision. Now the wait is on the non timber agribusiness products.

I think it was Jackobs newspaper post that said that some big agribusiness companies were using city dollars to buy up rural properties with the large water rights. Which companies are doing that, does anyone know ?

I agree with you on the director options. If the directors like it so much then they should put their own money into their companies.

 

[pch]

my level of maths is probably lower that yours.

Impossible

but wouldn't great southern's revenues (incomes) have been much less if they were only recognising 1/10 of the investors money for each year, especially when they first had their big jump in revenues ?

Also i think the 12 month rule only allowed deductions on the money invested if it was ALL used in the following 12 months.

That was just an example, lucky for me my friend was on msn when I saw your post. The answer to your second question is that the trees have to be planted within 18 months. (its now an 18 month rule). i.e. they can't take your money and sit on it for 5 years

I can't answer your first question at this stage, it needs much more detailed analysis and I don't beleive they GTP break down their income to that level in their reports.. suffice to say, I can guess that income is apportioned according to some formula of what work is done. Presumably they "write off" a bigger chunk of the income in the planting and harvesting years than normal years, and maybe an above average chunk in year five when they prune the side branches so the logs will grow straight and tall.

regards

 

[suhm]

Didn't this have something to do with why they changed annual report dates as they collect in principle revenue before july 31st because ppl want their tax breaks but they don't recognise it as revenue until the next financial year as the services have yet to be provided so is classified as deferred revenue. I'm not an accountatnt so

 

[Portfolio]

Totally wrong guys. This is how it works:

1.GTP sells woodlot for $9,000 per hectare + $900 GST
2.$900 (10%) is paid to GTP upfront but this is forwarded to the ATO so no cashflow to GTP.
3.$9,000 is usually financed by the woodlot investor but securitized with Adelaide Bank in the following year therefore is cashflow to GTP. This full $9,000 is declared as income by GTP (I don’t have the %’s with me but I think it is roughly 50% in the year it is raised and 40% the next year and 10% over the life of the project)
4.GTP spends roughly $1,500 per hectare to establish the plantations (cash flow out and expense in the year it is incurred)
5. GTP has minimal expenses over the life of the project after establishment (10% maybe)

Therefore from the sale of 1 hectare:

Profit and Loss:

1. $9,000 income
2. $1,500 establishment expenses
3. $1,500 commissions / marketing etc
4. $6,000 declared as profits.

Cashflow Statement:

1. $9,000 received from securitized debt
2. $1,500 paid to advisor and marketing
3. $1,500 on establishing plantations
4. $6,000 spent on buying the land.

This is back of the envelope type stuff but the actual figures are available in most of the broker reports. As you can see GTP is effectively declaring a huge profit (which it is making) and using that profit to buy land. The company is therefore not throwing off cash but is instead throwing off land so to speak.

PS: I agree the management options are robbery. Especially when they are not delivering results.

 

[reece55]

Portfolio
Thanks for clarifying this for the guys - you have illustrated what I was trying to say a while back. I actually worked for Adelaide Bank in their structured finance department for a small stint and what they are securitising is the future cash flows from the woodlots. It's actually a fairly easy program to run. Like I say, dont' knock the model..... it is all about the immediate deduction for the initial payment by the investor - thats why the stock takes a tumble every time ppl start talking about changing the deduction rules for tax purposes. If teh legislation changes, this may cause headaches..... but I can't see that happening in the future because all of the pollies rely on this rule for their own big deductions!

Cheers
Reece

 

[Bongo_Boy]

Thanks Portfolio.

I agree the money is going into land, the cashflow seems to be the problem though. When the price of the land got to $7,000 and the company wants to pay a 16c dividend as well, then before the 2nd use of the land the money starts to run out. Hence the hybrid equity / debt.

Clearly the move into cattle, olives and grapes was to help with that cash flow although initially a big expenditure is needed. Hence the increase in the level of debt over the last two years.

While punters wait to see if the buying of the land produces fruits, the endless conjecture about the way the government legislation will change is a definite negative for such punters.