GTP - Great Southern Plantations

[Nicks]

Just a recap on some of the things I have discussed with Jackob offline, in case they offer any value to everyone else:

Hi Jackob

Firstly thanks for your posts on GTP, I always read them with interest.

It confounds me also, this stock. I suspect the interested party / parties may be external to the MIS sector currently, but have no basis for this mind you.

Im holding on purely for return alone, and as you know stocks with good return attract Infrastructure Managemet funds.....I guess this the basis.

 

[Jackob]

Hi Nick,

Thanks for your reply.

The GTP's dividend yield looks very good at present, but it would have to be cut soon if its e/s dropped this year.

I understand that last years (FY2005-2006) e/s=42c and the profit margin (before tax) was 38%.

1) This years sales were reduced by 9% --- this would translate to a reduction in e/s of ~10c (so 32c/s left);

2) Debt more than tripled to ~$2/s --- this means a reduction in e/s of ~10c/s (so 22c/s left)

3) Last but not least, the total MIS fund under GTP’s management increases from ~$1.0B+ a year ago to $1.5B. Thus the GTP’s total expenditures (inc. labour, office, machinery, etc.) should also increase by at least 20-30% --- this implies a reduction in e/s of 14c/s-21c/s.

So how much left in e/s? Well, only 1c/s – 8c/s left, but for the reason of leniency in my last massage to Nick I said GTP’s e/s this year would be ~10c/s. Thus, imho GTP’s 15c dividend can't be maintained this year.

Cheers.

Just a recap on some of the things I have discussed with Jackob offline, in case they offer any value to everyone else:

Hi Jackob

Firstly thanks for your posts on GTP, I always read them with interest.

It confounds me also, this stock. I suspect the interested party / parties may be external to the MIS sector currently, but have no basis for this mind you.

Im holding on purely for return alone, and as you know stocks with good return attract Infrastructure Managemet funds.....I guess this the basis.

 

[Nicks]

Hi Jackob

Some interesting points but:

with point 1. did you consider the changing of their reporting period from 30 June to 30 Sept? anyway I thought they had excellent sales (will need to double check their reports).

Also, re point 2, debt, dont forget to factor in their target debt equity ration - this may be on purpose for tax reasons (have to go back and have a second look at their balance sheet to work this out). Debt is good sometimes.

Point 3 im not sure I understand, their MIS fund increased by $0.5 Billion Dollars, which would give excellent returns to us as shareholders. Anyway you superimpose this increase directly onto their fixed costs? one would think that their fixed costs would go up only marginally (ie you dont necessarily need to go out and purchase an extra photocopier, hire an extra secretary or rent a new office). In other words as a % return on their revenue their fixed costs are significantly reduced not increased.

Share price nice and strong today. Any thoughts?

 

[Jackob]

Hi Nick,

Point 1. Yes, the reporting period changed. But their sales dropped 9% from July-June pcp. (July-Sept is a hibernation season)

Point 2. debt/equity ratio now is close to 100% now.

Point 3. In FY 2005-2006, sales increased by 30% to ~$465M, but because of “expenses blow-out” e/s dropped. This year sales dropped by 9% to ~415M, and the total fund under management increased by ~45%, so the “expenses blow-out” will continue and profit will be reduced dramatically.

Don’t know at all why the price goes up today. T/O rumour again?

 

[Bongo_Boy]

As someone who is hoping GTP goes down, i actually think Jackob your view is a little unfair.

A lot of the debt interest is being paid automatically by the annuity product and GTP also announced that last year the cost increases were abnormal due to upgrades in their system and volume capabilities (which may have been a waste IF the non forestry tax concessions are now disallowed).

Also GTP has not spent anywhere near the $150 million on cattle properties as it did last year, with all the associated expense.

Also they should benefit, a little, from the recurring non forestry income starting to come through. And there is also minor benefit in the rotation of land for this year.

With the directors announcing at last years AGM, and then repeated more than once this year, that they will be judged by EPS growth, i expect EPS to be roughly similar and nowhere near a drop of 75%. Otherwise the directors will look very silly.

Hope you're right though Jacob, i'll have my money ready.

Portfolio, how did the sales figures stack up with your expectations ? I think your point about the underlying investment making a profit, along with Jackob's points on debt are the most crucial for long term GTP success or failure.

 

[hypnotic]

Hi Nick,

Point 1. Yes, the reporting period changed. But their sales dropped 9% from July-June pcp. (July-Sept is a hibernation season)

Point 2. debt/equity ratio now is close to 100% now.

Point 3. In FY 2005-2006, sales increased by 30% to ~$465M, but because of “expenses blow-out” e/s dropped. This year sales dropped by 9% to ~415M, and the total fund under management increased by ~45%, so the “expenses blow-out” will continue and profit will be reduced dramatically.

Don’t know at all why the price goes up today. T/O rumour again?

Something is definitely fishy with GTP.... there was a late surge starting around 2.45pm today taking out the sell orders in large volumes.

The only thing i can think of is T/O rumour... what else???

 

[Nicks]

"so the “expenses blow-out” will continue and profit will be reduced dramatically" - is this a fact, ie any info supporting this?

I think the reporting season is very valid in this case. m not sure we can make calls on the % sales until Sept, the company themselves in their most recent announcement "however 2007 sales are expected to continue through to the new close of the Company’s financial year on 30 September 2007." Also, nearly all of their projects sold out over subscribed. I dont think sales are an issue. In fact they look strong.

Ok, so I had a look through their latest stamement (Mar 2007):
Total Assets-$1.583 B, Total Liabilities-$868m, Net Assets-$714m, Cash-$93m

So the Debt Equity ratio is 1.1:1. Enough cash (but not too much) to operate. Net Assets comfortably cover the shareholders equity.
....Nice

Looks Pretty Health to me! Now we know why the SP has been going up. No wonder this is subject of takeover speculation - it's very healthy.

 

[Kat82]

Latest equity report (July 2007) from Macquarie shows their projections:

2007 revenue $426.6m EPS 31.7c
2008 revenue $449.7m EPS 32.0c
2009 revenue $499.9m EPS 34.7c

However, they also said "due to research restrictions, Macquarie cannot advise its valuation on GTP at present."

 

[Jackob]

Latest equity report (July 2007) from Macquarie shows their projections:

2007 revenue $426.6m EPS 31.7c
2008 revenue $449.7m EPS 32.0c
2009 revenue $499.9m EPS 34.7c

However, they also said "due to research restrictions, Macquarie cannot advise its valuation on GTP at present."

Kat82,

Thanks for quoting the latest Macquarie Report, which indicate GTP's e/s indeed will have a big drop from last years 42c/s (by ~25%), even though Macquarie is the GTP's t/o "advisor" and a positive bias is expected.

Last years GTP's sales increased 30%, but before its annual report, who would have thought its e/s would drop?

I have checked that GTP's e/s growth rates in the past 5 years were always lagged behind its sales growth by 30-50% with an average of ~38%. This says GTP's expenditure always habitually grew much faster than its income. This situation would have to be worsen this year due to its debt situation (debt : equity ratio = 1.1 : 1), and GTP was debt free just a couple years ago.

 

[Nicks]

A debt equity ratio of 1.1:1 is ideal. You dont want to be debt free as you are making no use of tax nor are you freeing up all the captial you have that could be invested in projects to generate return.

Also, @ approx eps of almost 0.35c this represents a fantastic return whichever way you look at it - approx 15%.

From Etrade, the median is 43-46c:

Forecast Earnings Trends
30-09-07 30-09-08
EPS (cents) PE Growth EPS (cents) PE Growth
Median 43.7 6.0 5.1% 46.4 5.7 6.2%
High 45.1 5.8 8.5% 46.7 5.6 3.6%
Low 31.7 8.3 -23.7% 32.0 8.2 1.0%

 

[Nicks]

I'd like to further add to this. I have a theory as to why the SP is bouncing.

Each time it retraces an Institution, as a precurser to a takeover offer, is buying up parcels of shares. I'm looking for a 'Change in Substantial Holding' notice coming out any moment soon.

 

[Nicks]

Ok so lets see if the theory has merit and if the SP moves up to close even or even higher from here. It would also help if I could see hour by hour volume as well (apart from manually checking). I am suspect that the volume once the share has retraced a bit for the day, or toward the end of the day, is relatively higher.

 

[barnz2k]

The price on GTP is a bit of a rollercoaster lol.

Thanks for discussing it guys - you seem to know what you're talking about and repping both sides

Good for someone like me with very little knowledge on it. Cheers

 

[Nicks]

Yes its all good discussion and information.

Guess my theory proved wrong (today). Volume has been significantly higher in the last week though.

Still quite impressed with the balance sheet. Very healthy.

 

[pch]

I've been away for some time - so busy right now.. and unable to contribute here unfortunately, I only glanced at their last report tonight.. I'll make some detailed comment at some point where I have a quiet moment to really read it. But there were a couple of interesting things I noted in relation to provisions for crappy plantations of a decade ago and the annual re-valution of their land-holdings.. something we discussed some months ago.

Crux of the matter for me is less about the debt incurred to hold an appreciative asset like land, but whether they are now paying too much for it. Jacob has aptly demonstrated months back that they have seen a significant erosion in margin.. GTP lives and dies by the rotation potential of existing holdings.. Study the figures carefully...

I suspect they will need a capital raising by mid this year to buy land for next year as they will soon fully draw upon their debt facilities. Last time I estimated that to get them to the point where rotations *really* kick in, it was going to be some $300mil. I think its safe to assume that they will opt to do this in 2 smaller raisings rather than 1 major one in the current climate

Still think carbon credits means little to GTP. Trees will never be in the ground long enough.. that alone is not a good enough reason to buy them methinks..

 

[Jackob]

Thanks to our old friend Pch for his most valuable views.

Overvalueing. It is indeed a worrisome problem that GTP might have grossly overpaid and hence overvalued its lands. I believe that in GTP’s recent report its hardwood lands were valued at ~$7000/ha, while in ANE’s latest announcements against the GNS t/o offer, the best forest lands in the Green Triangle Region (near the VIC and SA border) were valued at only ~$4200/ha. If these numbers are true, GTP’s lands (and its equity) have been overvalued by at least 50%. This may aslo help to explain why the chance for GTP being taken over is slim.

Debt. GTP’s ~100% debt/equity ratio should be viewed against the background of the market average of only ~37%. A 100% debt/equity ratio may be OK for a blue-chip company with robust business, but for a company like GTP with business under constant threat, it has to cause financial stress. Also note that GTP’s debts have been increasing dramatically in recent years from virtually nil.

Cap raising. So as Pch said by mid this year (FY?) GTP needs another ~$300m cash, which equals to ~$1/share. I’m not too surprised to hear that, but that cap raising would have to affect the sp in a big way, wouldn’t it?

By the way, GTP’s sp slumped again and the t/o speculation is waning?

 

[Nicks]

but for a company like GTP with business under constant threat, it has to cause financial stress.

Jackob - what constant threat are you referring to? please elaborate, further - 'a company like GTP', please elaborate, like what?


Also, pch, dont underestimate the power of Carbon credits. Its going to become a very valuable and billion upon billion dollar industry as the main method actually being set for reducing carbon emissions (money talks). Trees in the ground for any length of time create carbon credits (and GTP have a lot of trees) and I believe they are in the ground for several years.

Still, healthy balance sheet, great dividend, low p/e - good stock.

 

[Jackob]

but for a company like GTP with business under constant threat, it has to cause financial stress.

Jackob - what constant threat are you referring to? please elaborate, further - 'a company like GTP', please elaborate, like what?

Nicks,

What I meant by “constant threat” was mainly that companies like GTP have been under constant threat by Govt regulatory changes, such as,

1) Impending shutdown of all non-forestry MIS projects by 1/7/2008 (unless a court case against the Govt will be won by that time).

2) Impending Govt enforced “secondary market” for forestry MIS products targeting practices such as GTP’s “propping up” growers’ returns.

Those impending changes have already affected GTP’s business (such as the sales growth rate dropped from 30% last year to -9% this year), and this may also help to explain why GTP’s chance of being taken over is so low.

 

[pch]

At 9/2006 they had $246mil in undrawn debt
At 3/2007 they have $92mil in undrawn debt

Most of this bought land as expected. Investment property assets worth $522mil 9/06 and now worth $647mil in 3/07

Interesting to see what GTP's opposition are paying for land.. Jackob, check out the adjustment in the 'fair value' of investment properties in note 7. Last year they had to write them down by 7 mil due to the encumbrance rule. This half year they increased it by 5 mil. This is primarily because they adjusted their DCF model (amongst other things reducing the discount rate and increasing the estimated increase in land price).

Note also that the provisions on the balance sheet which is where they must account for propping up the returns to growers from plantations a decade back. Its gone down from 45mil to 11mil. I think this is a positive.. shows that they don't appear to prop up 1997 and onwards..

(The 45 mil was made up of)

dividends 34mil
1996 project timber. 10mil
employee entitlements 2mil

Next time I get time to post I'll have a look at how long it may take to run down the $92mil remaining..

 

[Nicks]

GTP is following an unusual pattern of rising heavily when it gets to the mid 2s.
It is rising today at a far greater rate than the market today - capitalisation of the opportunity the recent correction gave?
What forces are at play I wonder.