GTP - Great Southern Plantations

[Jackob]

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, …

Hi Pch,

I believe your are right by saying that “a large amount of the old land will not be used again as the early projects were crap”, because the above GTP numbers your quoted for lands available for rotation are reduced from those GTP announced earlier in 2005. (Please see page 11 of the file at http://gscentral.great-southern.com...=document&ID=28158&ObjectType=3&ObjectID=5169)

These numbers also includes lands in Tiwi islands already (also see p. 19-20 of the above file).

Note the lands on Tiwi islands are sold for every 0.5 ha per woodlot (instead of 1/3 ha normally), so each ha is sold for $6000 instead of $9000 normally. This is due to the low productivity of the lands (I guess).

 

[Jackob]

Again another simplistic scenario…
…
06 buy 25000 ha = 112mil
07 buy 29500 ha = 132mil

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

Hi Pch,

The models you and I used were both very simple and lenient to GTP.

The reality was that GTP in the FY2006 raised a total of $532M debt to generate only $450M revenue. I estimate that at least $200M of the $532M debt was for the $300M woodchip project.

The simple facts were
1) GTP increased its revenue by about 50% in each of the last 2 financial years (from FY04 to FY05 and from FY05 to FY06);
2) But its e/s was kept flattish around 40c/s for the last 3 FYs;
3) At the same time, its debt shot up from near zero to $612M, or $2/share.

I reckon in this FY07, GTP would intend to increase its revenue by at least 30% to $600M ($300M for woodchip and $300M for the rest) in order to maintain its e/s near 40c/s, at the same time it would need at least $600M new loan to fund the new projects. The total debt would be $612M+$600M=$1200M+, or say $4/share.

The only problem now would be whether any bank on earth would lend GTP such a big amount of $600M while its debt/equity ratio approaching 200%… The only alternative would be to issue $600M worth new shares, but the problem now would be if it would make the share price plunge to $1.50 … I guess J Young is just worrying these problems now.

 

[pch]

Now I'm curious about the PDS for next FY.. I'd say its a certainty they will increase the management fees (10-11000?) and may even dabble with reducing commissions. They may also change the grower lease arrangements as well. (they generally don't recognize that until year 10). They also may elect to plant a lesser amount of forestry and significantly increase their alternatives. (Thankfully we have kept this discussion to just forestry thus far)

This next section will include some income including their alternatives but I think at this early stage in their development, it will be still mainly forestry.

Part of the latest debt involves no interest as they purchased an annuity thing to pay it. It can in effect be ignored till 2011. But thats not all their debt, and their interest expenses are already 80% of the 05/05 FY.

They are also making some money from harvest sales and if the 3 months to Sep are anything to go by, it will a bit under double the 05/06 amount (26mil) to 48mil. (pity the interest expense above negates this )

They also get a bit from rental fees but they state that they don't recognize this as income until the value of the harvest proceeds can be recognized properly. My guess is it will be a little over 05/06. (14mil) but this portion of income will obviously grow over the years in accordance with the size of the projects from 1996 and the quality of the product (which I do know that in recent years is much better)..

Loan fees were 28mil and will not change much (the Sept quarterly implies this) I assume because the project sizes are not increasing..

So.. investor/growers may be pissed that their woodlot costs increase, but the deductions will still apply. I guess it depends on what their true motivation is for investing? (and how much they blindly listen to their commission gobbling financial planners

The cynic in me says they could possibly whack 30% increases into the structure of the 07 project and provided the FP's get their commission they will still close oversubscribed

 

[Bongo_Boy]

PCH, i guess the fee increases are possible now that the company claims to have bolstered their distribution network and the forestry product is oversubscribed.

If they don't then inevitable inflation and real price increases in wood should make the underlying investment more attractive than past plantations.

They'd want to establish some good year returns though, unlike at present i suspect.

Have a feelng that the cattle could be the real revenue / profit driver over the next few years. Of course that's if the government don't regulate the cattle MIS industry - which is always a possibility.

 

[michael_selway]

is GTP a good buy at current prices?

EPS(c) PE Growth
Year Ending 30-09-07 38.4 7.3 -7.6%
Year Ending 30-09-08 38.8 7.2 1.0%

Earnings and Dividends Forecast (cents per share)
2006 2007 2008 2009
EPS 41.6 38.4 38.8 38.9
DPS 15.0 15.0 15.0 15.0

thx

MS

 

[pch]

tell me the rest of your DCF assumptions..

This whole thread for me has been about seeing if I agree with the analyst estimates and what the year or 3 after that may entail..

 

[Jackob]

Now I'm curious about the PDS for next FY.. I'd say its a certainty they will increase the management fees (10-11000?) and may even dabble with reducing commissions. They may also change the grower lease arrangements as well. (they generally don't recognize that until year 10). They also may elect to plant a lesser amount of forestry and significantly increase their alternatives. (Thankfully we have kept this discussion to just forestry thus far)
...

To stop GTP from falling I agree that GTP should

1) Increase the woodchip project management fee from $9000/ha to $1100/ha - to save $2000/ha.

This $9000/ha fee was OK when GTP started 10 + years ago, when lands was only $3,500/ha and labour was also much cheaper. At that time GTP should have no problem at all to buy the land with the $9000/ha down payment. But now land is $7000/ha and GTP has to buy it with bank loans bearing a 10% pa interest. As the lands only appreciate about 4% p.a. in long-term, thus there will be a 6% p.a. long-term hidden loss. (The loss will be 60% or $4200/ha in total in 10-year project life time). So there is no way for GTP to survive without changes.

2) Cut its “commissions and marketing” expenses by ~1/3 from 16.5% of the revenue to 11% (from ~$1500/ha to $1000/ha - save $500/ha).

The above 2 measures have to be implemented with full coordination of all other (woodchip) MIS companies, otherwise will fail.

3) A 3rd possible measure is to defer more income to future years, thus to lower the profit margin (before tax) from 38.5% (of the $9000/ha) to around 15% (of the $1100/ha) and reduce the corporate tax by about half. This would save ~$600/ha, but it would also mean to cut e/s by half to ~20c/s (unfortunately).

I reckon the above 3 measures would be have a total improvement of $3000+/ha in cash flow and reduce the long-term hidden loss from $4200/ha to ~$1000/ha. Well, maybe the loss can be totally stopped if we take the dividend payment out of the equation! The risks are: revenue loss and share price fall (still better than being belly up).

 

[pch]

I'm hoping to get an answer on the issue of how much increased purchase costs impact on future asset values. They only value 1/3 of their property each FY, so it may take a while to asses, but 4% pa (on a 10 year timeframe) would be on the low side.

Where did you get the 10% pa from? I don't have their reports here but I'm sure I saw the figures at between 6.5 and 7% somewhere?

 

[Jackob]

Hi Pch,

The standard interest rate of home mortgages at present is 8% p.a., so the commercial loans should be 2% above it, to be 10% p.a.

The long-term appreciation of the rural lands, as I estimated previously, should be 1% above inflation. If the present inflation is 3% p.a., then the land value increases 4% p.a..

 

[Portfolio]

1. I like your analysis Jackob but it is unlikely they will increase the price of the woodlots or decrease comms as the project is already marginal for woodlot investors and there are a plethora of competitors in this space. Ie. The price is very elastic. (I would estimate that if they increased the price to $11,000/H their sales would more than halve). Probably same for halving commissions but maybe less.

2. They can however still decrease their “sales and marketing %” as spending did get out of control in 2006. They can decrease but not to 11% (use 15% as a guide).

3. They could defer income I guess but this would just be a timing difference and would have a big effect on the share price so they wouldn’t do it.

 

[pch]

Hi Pch,

The standard interest rate of home mortgages at present is 8% p.a., so the commercial loans should be 2% above it, to be 10% p.a.

Hey Jackob..

Here's the sept 06 notes..

Two main debt sources. The ANZ facility was $211mil, of which 75mil was used to purchase an annuity that paid the interest. In 2012 they repay $257mil. This coincides with their biggest land rotation.. (33991 ha - now that *is* nice). If we assume $11000 per ha by then they would sell 374mil of project with little capital expenditure.

The other debt is $245mil drawn to $200mil now and due in 2009, at an after tax cost of 5.8% pa they say here..

I wonder if they will do a similar thing in 07/08 as per this annuity setup for 2013? That year they estimate 27785ha.

 

[pch]

aha I forgot about your comment about the Tiwi islands selling for $6k per ha - that makes it the capital saving less than my previous post.. (i think would clear the debt ok but not leave much else)

 

[Jackob]

Hey Jackob..

Here's the sept 06 notes..

Two main debt sources. The ANZ facility was $211mil, of which 75mil was used to purchase an annuity that paid the interest. In 2012 they repay $257mil. This coincides with their biggest land rotation.. (33991 ha - now that *is* nice). If we assume $11000 per ha by then they would sell 374mil of project with little capital expenditure.

The other debt is $245mil drawn to $200mil now and due in 2009, at an after tax cost of 5.8% pa they say here..

I wonder if they will do a similar thing in 07/08 as per this annuity setup for 2013? That year they estimate 27785ha.

1) “The ANZ facility was $211mil, of which 75mil was used to purchase an annuity that paid the interest. In 2012 they repay $257mil.”

So what they really got last year was $211M-$75M=$136M and what they will repay in 6 year period will be $257M. Thus the real effective interest rate is

(257/136)^(1/6)-1 = 11.2% p.a.

which is even greater than 10% I used. In the original GTP announcement (17/8/2006), the final repayment for this loan was hinted to be only $215M on $140M principle, so many were mislead to believe the effective interest rate was only (215/140)^(1/6)-1 =7.4%, even better than home loan!

2) If the effective interest rate of other debt from CBA were truely 5.8% pa (after-tax), or say 5.8% /0.7 = 8.3% pa (before-tax), why wouldn’t GTP refinance its ANZ loan with CBA and save 3.9% pa? And how would CBA be vible by charging GTP’s unsecured commercial loan with an interest only 0.3% higher than home mortgage (8% pa)?

3) The number you quoted for the latest amount of land available for rotation published by GTP were

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

which were significantly low than those GTP announced 2 years ago (page 11 of the file at http://gscentral.great-southern.com...=document&ID=28158&ObjectType=3&ObjectID=5169). Judging by both your numbers (which didn’t have the 2011 figure) and the GTP’s 2 years ago (which had the 2011 figure), the land available for rotation in 2011 would not more than 15,000 ha. Don’t know where your number “33991 ha” was from.

4) Any way, like last year, GTP would have to get at least ~$300M cash within the next 3 month to buy properties and have “working capital” for preparing the non-pulpwood projects before the sale season ending June 2007. (I reckon the size of these projects has to double from ~$150M to ~$300M to meet the increasing expenses and to keep "e/s" stable). Where would the money be from?

 

[pch]

gday Jackob

The land rotation figures I am using was from the Sept roadshow

http://www.great-southern.com.au/default.aspx?MenuID=400

and you will see the 33000 figure there for 2012. What it says (and it has always bothered me) is 'assume Tiwi stage 2'.

re the effective real interest rate, your right it is very high, but its obviously geared to not penalise EPS over the next few years.. They are counting on the free capital from not having to borrow in that year paying this down.

But this year is the peak, with only 2013 coming close to it

 

[Jackob]

Hi Pch.

I have got your GTP Sept road show file. Thanks. Don’t know what “Tiwi stage 2” means. Also don’t know why the numbers are very different from in the other announcement 2 years ago when GTP just got the Tiwi lands. (http://gscentral.great-southern.com...=document&ID=28158&ObjectType=3&ObjectID=5169 )

Comparing the numbers in pages 26 and 27 of the Sept file, the CAPEX savings can be calculated as around $9000/ha. This is wrong, because what can be saved is only the expenses on land purchasing, which should be ~$7000/ha. For Tiwi lands, of which each ha has only 2 woodlots instead of 3 normally, the CAPEX saving is only about ~$4667/ha. Note that although the revenue from the Tiwi land is reduced by 1/3 per ha, the tree management and office expenditure overhead per ha is not likely reduced. Thus it wouldn’t generate much cash flow, if any.

Even if we assume that all 33991 ha land would be available for rotation in 2012 as GTP said, and each ha can save CAPEX $7000, then the total CAPEX saved would be $7000*33991=$238M, which would still not be enough to repay the ANZ debt of $257M. At the same time, if GTP’s debt continues to explode at the current rate, GTP would not survive to 2012 any way.

 

[pch]

Jackob are you in Perth? I'll be at the AGM for sure..

 

[Jackob]

Jackob are you in Perth? I'll be at the AGM for sure..

Pch,
Sorry, I won't be in perth.

 

[pch]

I did a basic spreadheet last night on forward projections and basically agree with your 300mil required assessment (around 2008 fy). (the sheet is nowhere near accurate enough though and is therefore nice to GTP).

But if we excluded the 200mil due in 2009 and kept existing profit margins, it seemed that they wouldn't need much more than this though. The rotation does start to make an impact from 09 onwards

So one feels that this 300mil may end up being split into dilution (yet again) and another arrangement somewhat like the current annuity thing around 2014..

Now in 2009 200mil falls due, and if they can refinance that again till 2013 and onwards, then its a question of getting the 300mil cash required.

I think keeping their other products out of the picture is a good thing at this point, but we will need to look at them to see how much they will somewhat subsidise the trees..

 

[Jackob]

In the 9 months from Jan to Sept last year, GTP borrowed $412M from the banks to fund its $450M 2006 project preparations. This year its project scale would have to increase to at least ~$600M ($300M for the woodchip, the other $300M for non-woodchip), and need desperately at least $550M for the preparations in the same period between Jan-Sept.

Where could that money come from?

 

[pch]

They still have 245m odd cash available if I recall so the borrowed money is also for 07 too.. (and they are hitting it hard at $7000 per ha)