GTP - Great Southern Plantations

[pch]

Guys much appreciated for clarifying this.. next question that GTP themselves wouldn't answer..

They have published the amount of land available for rotation and in 2007 its 5000+ hectares. Below is the latest table I found..

2007 5708 ha
2008 9455 ha
2009 8519 ha
2010 12323 ha

Now the PDS and ATO rulings for 06 and earlier specify that 5000 hectares will be planted with a capacity for oversubscription.

I have not been able to find figures on how much was actually planted year on year and thus how oversubscribed they were.

I therefore have to assume a large amount of the old land will not be used again as the early projects were crap, but even if we halve the 5000 hectare figure for 2007, its still a big capex saving and would leave enough to pay for present dividends.. (And that crap land may be sold I assume)

thanks

 

[Bongo_Boy]

Wow PCH, the company wouldn't answer
That's not a good sign. Did they give ANY indication.

The "crap land" idea you have with the early releases would explain that although as you say it could be sold.

With the CAPEX savings, if you take the whole 5000 ha times the full max $7000 for land that still comes to $ 35 million.

On 310 million shares that's only 11c per share for dividends etc

If the price of the land is $7000 then that just leaves $3000 for planting, sales, commissions, administration, tax and profit.

If we take the price of the land as $ 5000 then that's better, but it means the capex savings is now only $ 25 million on rotated land or 8c share.

If we take half of the 5000 ha as rotated this year, that is a saving of 2500 ha times $ 5000 = $ 12.5 million or 4c a share.

I think there is still a problem with cashflow, at least in the short term, but hope i am wrong for the sake of all holding punters.

 

[pch]

Wow PCH, the company wouldn't answer
That's not a good sign. Did they give ANY indication.

Actually I was unfair, I should have said "couldn't". I don't think it was an unwillingness issue I think it was more the info was not on hand from a phone call..

Anyway please peruse these figures below and see what you think..

I'm still trying to work out how many acres would have planted in 05 and 06. We know its $9000 per woodlot and a woodlot is .33 of an acre. If forestry sales for 06 was $314,000,000 then we divide that by 9000 and that says we planted almost 35000 woodlots. That would amount to some 11500 odd acres. I 05 works out to 11100 odd acres via the same logic.

I read, buried in I think the PDS for the 06 project, that 500 acres were rotated so they may have planted a little more than the 11500 figure.

If that is accurate (and please tell me if it is not), do you think that its reasonable to assume 11500-2000 acres for 2007, but with half the 07 5700 acres available for rotation?

 

[Bongo_Boy]

Hi PCH,

working in hectares, it looks like $3000 (excluding gst) per woodlot. And one woodlot is 0.33 of a hectare.

So it would be approx 35000 hectares or 105000 woodlots for last year.

Just readng GTP's latest annual report (28 Sept) which says they aquired 35,000 hectares for the last year which seems to balance with the above.

 

[pch]

you just pipped me at the post.. got a call back.. my bad its $3000 per woodlot and $9000 per hectare. They plant around 35000 hectares per annum. If you do the math the $314,000,000 works out about right.

So if we stick to an assumption of half the 5500 odd ha being used for the next rotation, then 7% of the land will be rotation in 07. However I asked investor relations this and was told "Yes, if we describe it as available for rotation we would be using it in current projects". Thus it may be more like 10-15%.

 

[Bongo_Boy]

Hi PCH,

did they give any indication regarding your 'crap land' theory of earlier projects or the current price for the land that they are paying ?

thanks.

 

[pch]

Hiya

in the course of the correspondance I asked this and it wasn't answered the first time because I my fingers kept typing acres and my brain said hectares.. once we cleared that up I asked

"so in relation to the rotation of land for 07, is the amount of land disclosed as available for rotation suitable for use in current projects?"

and his answer was the quote from previous..

So later I'll try and make estimates for the non forestry stuff, where the expansion should be.. There is 9mil spent this FY that shouldn't be spent next FY (provisions for 1996 project they say is the last). If other costs haven't blown out too much, it should be an ok year. However, I haven't yet checked for/included equity dilutuion in this FY that may undo a potentially good result..

 

[Jackob]

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.

Hi Portfolio,

Well done! Glad to see your work after I am just back from holiday. To make your tables more realistic, however, I would like to modify them by adding in a few more items as follows.

Profit and Loss:

1. $9,000 income
2. ($1,500) commissions / marketing etc
3. ($1,500) establishment expenses
4. ($1,000) expenses on established trees
5. ($1,000) office expenses
6. ($ 500 ) expenses on debt interest
7. $3.500 declared as profits before tax
8. ($1,050) corporate profit tax (30%)
9. $ 2,045 declared as profits after tax.

Cashflow Statement:

1. $9,000 received from securitized debt
2. ($1,500) paid to advisor and marketing
3. ($1,500) on establishing new plantations
4. ($1,000) expenses on established trees
5. ($1,000) office expenses
6. ($ 500) expenses on debt interest
7. $3,500 operating cash flow before tax
8. ($1,050) corporate profit tax (30%)
9. $2,045 declared as operating cash flow after tax
10. ($1,000) expenses on dividends
11. $1,045 left for buying land

Note:
1. GTP’s profit margin (before tax) was about 38% last year, so the $3500 profit (before tax) for each $9000 revenue is more realistic (Item 7).
2. Items 4 and 5 are increasing year by year as the area of established trees is increasing.
3. Debt interest (item 6) is also increasing dramatically. Last year’s debt increased from $80M by $532M to $612M. These debt will cost ~$65M p.a., more than 10% of the total revenue ($450M)
4. Just 2 or 3 years ago, GTP’s pulpwood revenue doubled year by year, so the item 1 in the cash flow table should be halved for each hectare new land.

Now return to the above tables. The $1045 cash left is not enough to buy a hectare of land, which is worth about $7000, so GTP has to borrow at least $5000, or ~56% of the $9000 revenue, from banks for it. [As said in the Note 3, last years new debt ($532M) in fact was about 118% of the total revenue ($450M)]. Say each hectare of land still only needs $5000 debt, which cost about $500 p.a. in interest. On the other hand, the valuation of the land is increased only 1% above inflation (say 3% pa) in long term. So the total revaluation of the land is about $7000*4% = $280 pa, which is far less than the interest cost. Thus the GTP pulpwood projects are actually in a chronic loss year by year, while in its accounts as shown in the above table, it still managed to have a huge profit margin (38%) and big profit and e/s so far.

So this is why people often say the GTP projects are unlikely sustainable in long-term, and why in recent years GTP’s debt is skyrocketing while its “profit” (and e/s) is flattish. Obviously, in the coming years GTP’s profit and e/s will have to drop, and its debt will further skyrocket.

 

[pch]

I think your cost estimates look good.

I'm sure I read that GTP do not intend to plant much more than 35000ha per project and grow via their non forestry stuff. Thus should make it easy to test their land acquisition argument going forward.

We also have the land rotation figures, so we should be able to produce a cashflow/pl statement year on year and see how it looks incorporating reuse.

The current land reserves should be there also, so we should be able to determine when they will need to borrow again..

 

[pch]

Here's a thought Jackob..

Land costs averaged in the 06 report was $4784 per ha.
Land costs in the sept 3 months is $7000, a difference of 30%.

Doesn't it then stand to reason that the value of the existing land of GTP will rise at a higher rate this FY than what they use in their DCF calculations for encumbrance? (2%)?

(broadly speaking only - not taking into account regional considerations)

 

[Jackob]

I think your cost estimates look good.

I'm sure I read that GTP do not intend to plant much more than 35000ha per project and grow via their non forestry stuff. Thus should make it easy to test their land acquisition argument going forward.

We also have the land rotation figures, so we should be able to produce a cashflow/pl statement year on year and see how it looks incorporating reuse.

The current land reserves should be there also, so we should be able to determine when they will need to borrow again..

No doubt GTP will never want to plant more than 35000ha new trees per year, if these projects are only making long-term losses as analysed in my previous post. But GTP couldn’t reduce the acreage either, as any reduce will affect its “revenue”/“profit” and make its book look awful.

TIM has limited its woodchip project size for many years now. The woodchip project is only about 10% of TIM’s total business now and fast approaching self-sufficient with land rotation. At the same time TIM developed various other projects, but found all of them didn’t make much money, except its almond project, which now makes up ~50% of TIM’s total business.

GTP is now clearly trying to copy TIM’s model, but unfortunately it might be too late. Its woodchip projects is about 10 times as big as TIM’s, and its non-woodchip projects, such as cattle-farm, are also obviously loosing money (as analysed in my early posts month ago). This is a sorry story for GTP, for both shareholders and MIS investors.

 

[Jackob]

...

Land costs averaged in the 06 report was $4784 per ha.
Land costs in the sept 3 months is $7000, a difference of 30%.

Doesn't it then stand to reason that the value of the existing land of GTP will rise at a higher rate this FY than what they use in their DCF calculations for encumbrance? (2%)?

...

I don’t think GTP’s land value would ever jump 30% in 3 months – something wrong here.

The rural land value should not grow much faster than inflation in long term– it is determined by average land productivity.

The land price rise is a negative for GTP, as it will force up GTP’s capital cost while GTP’s total income ($9000/ha) remains constant.

 

[pch]

Yeah I had drawn a similar conclusion re TIM, and I hold a lot more of them (they are the first stock i ever bought actually). I liked GTP's aquisition strategy, but not at 30% on what it cost in 06..

There comes a point when they would realise more shareholder value from selling off the land. If the big increase this year is broadly reflected across all their holdings..

But there is no sign of that presently, if they are still paying $7k per ha on $9K per ha project.

BTW I think this has little all to do with the current share price woes as TIM has had a similar capitulation.. But this is all great info..

 

[pch]

I don’t think GTP’s land value would ever jump 30% in 3 months – something wrong here.

I never said 30%, but what I am I'm implying though, that if they are paying current market rates for land then surely their existing assets will in some way reflect that change as well.. (not 30% though)

I asked them about the difference in cost..

"Land costs really vary, depending on region etc. During the 3 months to
30.9.06 the land we acquired averaged $7,000 per hectare as per the
report. We find we are competing against a lot of other land users,
for good quality agricultural land and this makes for strong market prices"

 

[Jackob]

Yeah I had drawn a similar conclusion re TIM, and I hold a lot more of them (they are the first stock i ever bought actually). I liked GTP's aquisition strategy, but not at 30% on what it cost in 06..

There comes a point when they would realise more shareholder value from selling off the land. If the big increase this year is broadly reflected across all their holdings..

But there is no sign of that presently, if they are still paying $7k per ha on $9K per ha project.

BTW I think this has little all to do with the current share price woes as TIM has had a similar capitulation.. But this is all great info..

I reckon GTP wouldn’t sell any lands before it had gone under.

The first thing needed now is to stop buying the lands at $7k/ha. But as I said earlier they wouldn’t – this gives you a glimpse to the depth of the problem.

Another thing about the land value – it’s said to be pushed up by large-scale acquisition of the MIS projects in recent years. If they wanted to sell the lands one day, the price would be pushed down.

TIM is fundamentally in a much better shape than GTP. So their price trends should be a bit different in coming months.

 

[pch]

Again another simplistic scenario.. As of 30/9/06

assume $7000 per ha

Cash: 246mil
Unencumbered Land: 58mil (i'm assuming that unencumbered is available for projects). I assume $6000 per ha here because some of this is last year.
= 9500 odd ha
rotation land = 500ha
Buy: 25000 ha at $7000

= 175mil

07/08 FY

cash remaining: 70odd mil

rotation land 5500 ha
buy: 29500ha = 206mil

= likely 07/08 borrowing of $136mil based on remaining cash (206-70) being available from 06/07 FY. (i told you it was simplistic ;-)

If the price was still 06 averages however it would be more like

06 buy 25000 ha = 112mil
07 buy 29500 ha = 132mil

which would have been paid out of the current cash/debt.. :-(

 

[Bongo_Boy]

Doesn't this company claim to have a spare 100,000 hectares of land on Tiwi islands for use in timber plantations ? And about 150,000 hectares currently under plantation ready for use in the future ?

In theory, you would think they could use the Tiwi land for the next three years and not pay 1c extra for buying new land. Then $132m profit would actually be $132 million profit.

I would presume that the land has to be ready for planting and that the company would not want all of one years product in the same geographic location, but it should be a pointer to their present state of affairs.

Because the companies plans only allow for modest use of 'free land' over the next few years you'd have to wonder if that is in fact the true present state of affairs or is there something that is not being disclosed ??

 

[pch]

Bongo, I thought exactly the same thing, but surely that is an unencumbered asset? Even if not, it has to be there somewhere in the financials?

 

[Bongo_Boy]

PCH, I'd like to have a sit down and a long coffee (or stronger) with one of the directors.

 

[pch]

.. or attend the Feb AGM and ask awkward questions