The oversubscription relates to this year where the changes do not apply. I expect next year also to be huge for them now that the transition arrangment is extended a year..
So I feel that just because its oversubscribed now is not an indication that people are in it for more than the tax breaks. In fact GTP even said publicly they expected the effect of all this was to have a boom in their non forestry while investors scrambled to take advantage while they still could.
The only way you can make an objective assessment about their non forestry is in the year the change takes effect, or if the test case results in GTP's favour.
I also feel that GTP is solid, however I do agree with Jackob though, that they face some *serious* dilution or *serious* additional debt to fund their stated aim of 35000 ha per annum until rotations from past projects become significant enough to cover it. (When that happens, the company will start paying down the debt they have thus far accumulated.)
You really need to study the financials with this company. They have enough cash reserve to buy land for this year at $7000 per ha. But next year they will need more cash - a similar amount to the debt they undertook. I believe they will do a similar arrangement to what they did with the last debt - defer interest to when the loan matures and use the capital savings of land rotation to pay the loan out. (Interest is still charged, but its not paid in the year it was incurred)
Assuming their rotation figures are accurate, they can easily pay out their existing debt with some left over.
But the loan maturity co-incides with their largest rotation year coming up (I think it was 2009 or 2011). Later years are actually not as good as this particular year, so the next debt they incur to fund the purchase of land will be tighter as they will have less capital savings from rotations..
Here are some key facts..
- They are now paying 30% more for land than they did last year
- At the time when they reported their cash reserves of a couple hundred million, they did not have that much 'unencumbered' land on the balance sheet - in other words, most of the existing cash reserves will be used to buy the land for this years projects as they do not have that much already bought
- GTP recognise increased land value as income in the year it increased. Think of it as reverse depreciation. So if they have their land holdings valued at $100 million more than it was last year, they will recognise that as income and it will positively contribute to earnings per share. (The encumbrance rule will then impact on this however)
- If they are paying 30% more for land, then the value of the land they already have should have increased a lot more than the 1-2% CPI figure that is usually associated with agri land.
- Land rotation savings are really not that significant just yet. Even the next couple of years of land available for use from rotation is way less than half the 35000 ha they want to plant each year.
eg say 10000 ha under rotation available and they buy 25000 more ha. 25000*7000 per ha = $175 million. But after this year they probably have some $40-50 million in cash reserves and need to go to the bank again (or issue more shares and dilute).
Now in saying all this, TIM share price also capitulated. TIM do not buy land nor have the same debt requirements. So I do feel the regulatory stuff is the issue and I do think that its currently below fair value (based on NTA alone and consider that those assets should rise in value)
But GTP will likely really start to hit its stride when the rotation figures start to kick in and take up more than 50-80% of their annual land purchase requirements. They won't need to borrow anywhere near as much as previously.
But to get to that, I did a really rough estimate that at $7000 per ha, they will need another $300 million over 3 years to get them through to when they have a lot of rotation. THEN they pay down the debt so you won't immediately get some great EPS. That will take another 2-3 years to flow through and then the company should be in a wonderful position.
At some point I think that common sense will prevail and the market will work some or all of this out
How patient are you! GTP is the true test of the value investor