GTP - Great Southern Plantations

[pch]

Nicks, Jackob does not have to answer this, as I have posted on the subject several times in this forum and it has been discussed between me and Jackob in the past.

Each financial year they have to account for this sort of expenditure. If they know that they have to prop up returns, its a liability they face in the future. Therefore, they account for this on the balance sheet.

If this was not a legal requirement, you could not get a true value of the assets of a company because you do not have an accurate sense for the liabilities a company has. Do yourself a favour and pick up the last 3 annual reports and check the balance sheet and look for provisions and then read the notes to go with it.

So, for the year that they actually pay out this propping up money it will be among the expense on the income statement and the provision should accordingly reduce on the balance sheet when the money has been paid.

So, for example, if you put aside $40mil to prop up returns for the next financial year, you will then theoretically have a $40 mil expense for that next year, but the $40mil becomes $0 on the balance sheet.

 

[Jackob]

Hi Nicks,

A “conspiracy” between GTP’s CEO, CFO and Growers? And also the ATO?

The following is quoted from Note 33 of GTP 1995 Annual Report (p 86, GTP 2006 Annual Report, GTP Website)

"5. On 29 July 2005 Great Southern Export Company Pty Ltd (GSEC), a wholly owned subsidiary of the company, purchased all of the timber from the 1994 Project for $6.4 million.

"GSEC acquired the timber from the 1994 Project investors, primarily driven by efficiencies this option provided in timing of shipping and GST related issues. In setting the price for that timber GSEC took account of additional timber resource held by the consolidated entity on its own account, the actual yields achieved in the Project and the prevailing woodchip price and then paid a significant premium to the investors over and above the return they would have otherwise achieved. Whilst Great Southern was under no legal obligation to do this, the board determined that it was appropriate as the consolidated entity had previously taken active measures through the acquisition of additional timber resource to mitigate the impact that significantly lower yields may have on the 1994 Project. Whilst this resulted in an after tax expense of around $3 million being included in the results for the year ended 30 June 2005, the cash impact is substantially off-set by the sale during the year of Great Southern’s own timber resource."


So, the total return to the 1994 growers should not be greater than the value of “all of the timber from the 1994 Project (purchased by GSEC) for $6.4 million”.

But this purchase unfortunately “resulted in an after tax expense of around $3 million being included in the results for the year ended 30 June 2005” , and this “after tax expense of around $3 million” was actually a before tax expense of “1994 Project timber (note 33)” of "$4.365 million" (page 64 of the Report)!

So the real crop of the 1994 Project was not more than $2.0m, which was “topped up” by $4.4m, or say 220%, to $6.4m.

Similar “topping up” (or “propping up”) records can also be found in GTP’s 2007 (ending June) Annual Report (Notes 5 and 37).

So this is what called “topping up” the growers returns! 220%!

PS: Yes, just as Portfolio said, "Jackob does not have to answer this, as I have posted on the subject several times in this forum and it has been discussed between me and Jackob in the past." Sorry I didn't see his post before posted mine.

 

[Rainmaker2000]

Just to change the direction of this thread.......I wonder if anyone can explain the recent sudden share price tumbles of plantation owner Timbercorp and manager Select Harvests with GTP price staying relatively strong.....these price tumbles have occurred on the back drop of absolutely no news or announcements....this is just speculation, but would it be fair to conclude that if SHV and their friends TIM were looking to swallow up GTP and have had their offers knocked back, then the share prices would act in this way...its just an idea as TIM and SHV would seem the most likely owners of GTP assets in my mind

 

[Jackob]

Just a correction.

The second paragraph of my previous post should be

“The following is quoted from Note 33 of GTP 2006 (NOT 1995) Annual Report (p 86, GTP 2006 Annual Report, GTP Website)”.

Sorry for the confusion.

 

[pch]

and for the record Jackob - you cut me deep... you credited portfolio for my post

Excellent digging you did there by the way

 

[pch]

Just to change the direction of this thread.......I wonder if anyone can explain the recent sudden share price tumbles of plantation owner Timbercorp and manager Select Harvests with GTP price staying relatively strong.....

Don't change the direction now , its one of the most useful threads on this site. But IMO, TIM are hardly in a position to buy GTP, and I know nothing of the other one. I think that potential suitors in relation to takeover parties are likely your large diversified infrastructure mobs like BNB who ike to acquire quality assets and have enough exposure in different sectors to mitigate risk.

 

[Portfolio]

Jackob is right.

If $6.4million was paid to 1994 investors.
And $4.365million was "propping up" (per the accounts) then the actual wood was worth $2.035million.

Therefore wood (sustainable) payout was 31.7% of the payout and "propping up" (unsustainable) payout was 68.3% of the payout.

Therefore given $5148 was actually paid out:

$1636 was wood
$3511 was "propping up".

Can the company stop "propping up"? What do you think the past woodlot investors would do if the company returned them $1636 for their $3,000 investment 11 years ago? What effect do you think this would have on sales?

 

[Rainmaker2000]

I thought it was widely known about this 'proping up' of returns, the company published it (reluctantly) and even Four Corners reported it.....I guess it is less known whether they will do it in future years......I can't really value this stock but I doubt its overvalued

 

[pch]

You either believe them or you don't.. quoted from their annual...

"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.

The decision to use GSEC and the amount to be paid is assessed by the board on an annual basis and no decision in respect of the 1996 Project has currently been made. The board and management’s current expectation is that the 1996 project is likely to produce yields similar to the 1995 Project, though still lower than what would be expected from a new Project today. Whilst the Group has no legal requirement to do so, if it decides to acquire timber resource from investors in the 1996 project in a similar manner to the approach adopted for the 1995 project, an after tax expense of up to $6,700,000 may be incurred in the next financial year. It is the board’s current view that no consideration will be given to incurring similar expenditure for the 1997 or subsequent projects."

This is the among the first things I check for when they release a report..

 

[Nicks]

Nicks, Jackob does not have to answer this, as I have posted on the subject several times in this forum and it has been discussed between me and Jackob in the past.

PCH - chill pill time. Its not taking sides or you vs me (or you, jackob and portfolio vs me). Its about discussion and opinions. As a member of this forum I requested more info. Jackob has done this (thanks) and im sure anyone would agree that this has resulted in more research and info to share. Dont really see a problem.
Fortunately Jackob posts info to substantiate his claims rather than posting riddles.

Anyway back to the discussion we are all entitled to have.

Jackob:
"took account of additional timber resource held by the consolidated entity on its own account, the actual yields achieved in the Project and the prevailing woodchip price and then paid a significant premium to the investors over and above the return they would have otherwise achieved."

Whats so bad about this? help me out here if I am missing something. They paid a premium and have listed the reasons why. Looks to me they did the right thing by investors and whilst they didnt have to pay them a premium.... for the reasons as listed, they did probably because of the value of the timber to them. I dont read it as a bail out. Looks like they were 'propping up' their own reserves after selling it off during the year. Perhaps there is really not enough info to extrapolate. I would have preferred more info from the company I must admit.

PCH:
"I think that potential suitors in relation to takeover parties are likely your large diversified infrastructure mobs like BNB who ike to acquire quality assets and have enough exposure in different sectors to mitigate risk."
Are you saying you think GTP is a quality asset?

Also, dont forget the other reason why this company does well, tax benefits, future green benefits etc. Im quite happy about investing in a company that plants trees and renewables. Investors are also in it for the tax benefits.

Naturally Project yields of a commodity are going to fluctuate year to year. Dont forget all the tax benefits investors realised from those projects.

Bottim line: To the best of my knowledge GTPs investment products remain over subscribed and fully sold and they benefit from their management fees, AND their balance sheet remains excellent.

In the meantime I will keep holding and take a good dividend yield and await news of a takeover (if it pans out).

 

[Nicks]

"MIS funds will now have to prove that at least 70 per cent of the investment is for actual tree plantations, or their investors lose the full tax deductibility."

Jackob - I pulled this from the news article you posted last Dec.

Remember - GTP has a greater than 70% interest in forestry. We must not forget the tax benefits investors get from investing in these projects. It remains and while it does, GTP will continue to make strong sales.

 

[Jackob]

... quoted from their (2007) annual...

"… Whilst the Group (GTP) has no legal requirement to do so, if it decides to acquire timber resource from investors in the 1996 project in a similar manner to the approach adopted for the 1995 project, an after tax expense of up to $6,700,000 may be incurred in the next financial year. It is the board’s current view that no consideration will be given to incurring similar expenditure for the 1997 or subsequent projects."

The above quote indicates the “topping up” has to be closing down anyhow. This point was originally discussed in Pch’s 22/4/2007 post.

Indeed the “topping up” is not new, but the vast public/growers/shareholders knew little about the sheer scale (100-220% on the real return). People used to be refrained from talking explicitly on it.

 

[pch]

PCH - chill pill time. Its not taking sides or you vs me (or you, jackob and portfolio vs me). Its about discussion and opinions. As a member of this forum I requested more info.

perhaps you misunderstand my intent as thats about the 3rd of 4th time I have quoted GTP's report on the prop ups.. But if you ask Jackob he'd likely tell you that he disagrees with my assesments quite a bit I'm less bearish than he and Portfolio are...but probably not quite as bullish as you

regards

P

 

[Jackob]

"MIS funds will now have to prove that at least 70 per cent of the investment is for actual tree plantations, or their investors lose the full tax deductibility."

Jackob - I pulled this from the news article you posted last Dec.

Nick,

I reckon “MIS funds” in the above quoted news article was meant to be “tree plantation MIS funds” and “for actual tree plantations” was meant to be “for actual tree husbandry”.

Please read more posts around that time to find out those meanings.

This “at least 70 per cent for actual tree husbandry” regulation is targeting MIS companies, such as GTP, seemingly very high profit margins (before tax) of say 38% last year or as high as 60% in early years. In such circumstances, after deducting the profit margin and 15%+ commissions and promotion expenses, the real money left on tree husbandry is only 25% - 47% from growers.

The enforcement of the “at least 70% tree husbandry” rule, would force GTP’s profit margin (before tax) being reduced by more than half from 38% (last year) to ~15% (100% minus 70% tree husbandry minus 15% commissions). This is why I would say that GTP’s e/s would have to be less than 15c or 20c/share this year.

 

[So_Cynical]

I looked at GSP and a few other similar projects 10 or 11 years ago
and was stunned at the numbers...it was obvious to me as an industry person
that they were...lets say...over reaching with
there targets and claims in general.

I was left with the impression that the projects
were about fees not trees.

 

[Nicks]

Nick,

I reckon “MIS funds” in the above quoted news article was meant to be “tree plantation MIS funds” and “for actual tree plantations” was meant to be “for actual tree husbandry”.

Please read more posts around that time to find out those meanings.

This “at least 70 per cent for actual tree husbandry” regulation is targeting MIS companies, such as GTP, seemingly very high profit margins (before tax) of say 38% last year or as high as 60% in early years. In such circumstances, after deducting the profit margin and 15%+ commissions and promotion expenses, the real money left on tree husbandry is only 25% - 47% from growers.

The enforcement of the “at least 70% tree husbandry” rule, would force GTP’s profit margin (before tax) being reduced by more than half from 38% (last year) to ~15% (100% minus 70% tree husbandry minus 15% commissions). This is why I would say that GTP’s e/s would have to be less than 15c or 20c/share this year.

? i'm confounded by your mathematics.

I assume the 100% is referring to Gross Profit.
why minus 70%?
why minus 15%? (these are an expense?)

 

[roland]

I just took GTP off my watch list. Have done OK in the past, but feel the future or anything to do with agriculture is going to have a hard time of it with water and drought etc. Just my $0.02

 

[Jackob]

? i'm confounded by your mathematics.

I assume the 100% is referring to Gross Profit.
why minus 70%?
why minus 15%? (these are an expense?)

Hi Nicks,

“100%” refers to the tree growers’ money, or their upfront fee for the 11-year projects, which also is GTP’s “sale revenue” (down 9% ending 30/6/2007 as announced), roughly equal to its “(gross) income” in its “profit and loss” account (it will be announced by end of next month).

According to the new “at least 70% rule”, at least 70% of growers’ money (GTP’s income) has to be spent on “direct tree husbandry”. Obviously the “commissions and promotion” expenses (15%+ of the sales) won’t be counted as “direct tree husbandry”. Thus what left is

Profit margin (pre-tax) = 100% - 70% - 15% = 15%

Which would be much less than last year’s 38%.

 

[Nicks]

Thanks Jackob, but i'm still not sure I understand why you would not include the 70% dervied from trees in their income. Perhaps I am just not following.

 

[Jackob]

Thanks Jackob, but i'm still not sure I understand why you would not include the 70% dervied from trees in their income. Perhaps I am just not following.

The “70%” in the “70% tree husbandry rule” refers to
70% of the fees GTP collected from tree growers
= 70% of GTP’s sales revenue
~ 70% of GTP’s income.

It says that at least 70% of the tree growers’ money to be spent on the trees. Fair enough. Thus it targets the very high profit margins (38% - 60%) in the past.