GTP - Great Southern Plantations

[Jackob]

Hi Captain,

I saw what you wrote in your “signature” of your “profile”, (quote) “I'm just a beginner. Dont take me too seriously…”, so I won’t take your words all too seriously. But I am still interested in the following.

“…Later projects are 3 times the size of earlier projects at the same point in the projects life. … Last results for 2006 returns to growers looks to be about $4300.”

First I reckon the 2006 results should not be the latest by now. The latest should be the 2007. The pulpwood projects were initially of 10-years, but delayed for 1 year and all become 11 years. Growers hand in their money every year by the "June 30" deadline and should get the returns around the same date in 11 years. Today it is already 28/11/2007. Why haven’t we heard anything about the 2007 results?

Two possibilities.
(1) The project might suffer a further delay and probably have become a 12-year project. (But why no announcement?)
(2) The 2007 results were so poor that no insiders want to talk about.
(3) Or what else?

As to the earlier results of 2005/2006, we had very good discussions on this thread about a month ago from posts #975 (5/10/2007) onwards. If you go back to read those posts again, you may find that the “earlier results” were all dramatically “topped up” (or “propped up”) by up to 220%.

So even if it is true that “later projects are 3 times the size of earlier projects”, the future returns would still probably not be more than the returns in earlier years (after “propping up”).

Your 2006 returns number “about $4300”, I think refers to the $3000/lot initial investment, and it only represents a meagre 3.3% p.a. return over 11 years, barely matching the inflation. At this return rate, all the investors using a loan would lose money badly.

Alas!

 

[pch]

Captain

In relation to your post on Jackob's negativity to GTP, what is preferrable?

Nothing but fanboy ramping eg "its all blue sky from here" is of much less value than someone who is bearish and prepared to tell you why, to a level of detail that allows you to make much more accurate decisions.

For that reason, I really like the GTP thread. Jackob and Portfolio in particular encourage me to keep researching and justifying my views.

regards

pch

p.s GTP is an excellent company to use to learn how to read annual reports

 

[Portfolio]

Jackob,

I think the $4,300 figure is the return from the 1996 project (delivered in 2007). So i suspect the answer to your question is #2 - its bad so they dont want to talk about it. Not sure where i read that though and they should really be disclosing this stuff to the ASX. Pretty sure there is still "topping up" in that as well but dont quote me on it.

If anyone else out there still thinks MIS is viable after companies have to actually pay out returns (yes they get to hide things for the first 11 years and then a few more if they "prop up" returns) look at their latest acquisition (ASX announcement dated 05/11/07):

They bought 14,700 hectares of hardwood plantations for $47.3 million. And the plantations were established "between 1993 and 2003".

Assuming an average planting date of 1998 this means they have effectively bought 44,100 (14,700*3) "year 9" woodlots for $47.3million. Dividing $47.3million by 44,100 equals $1,072 which means they have bought "Year 9 woodlots" for $1,072. Now given they sell a year 1 woodlot for $3,300 and sell them based on research which somehow predicts 7% returns (with alot of disclaimers). Assuming "woodlot investors" expect a return (surely they do and would expect at least 7%) they would be expecting something around $6,000 after year 9.

AND:

1. They have now increased the upfront fee making the hurdle rate higher.
2. I have assumed that the 50% interest in the woodchip mill that was in the same transaction is worth nothing but was instead just a smokescreen to stop this type of analysis.

I realise that this is a very crude calculation but I think people get the point. Hows that for cynical. Now you will think Jackob is a bull on GTP.

 

[pch]

Yes Portfolio the lack of transparency totally sucks. On one hand they state via their provisions that they do not expect to need to prop up returns again, but they do not publish any .. hmm whats the word ... 'density estimates'.

But the proposed part of the legislation that makes MIS schemes 'tradable' after 4 years? was I think designed in part to alleviate this.

One can look at it this way.. Their argument was that originally management of the planting was outsourced in the early days and now via improvements in land selection, preparation and genetic stuff, the trees are on steriods and bigger, fatter and therefore much more pulp per ha.

There is absolutely truth to this.

But by Jackobs figures (prop up by 4.6mil), you would require the pulp yeild per ha to triple, assuming prices are flat. I'm sure I spied a graph in their roadshow showing an increase in price for the resource but it was not huge so lets be fair and assume that if yields increased by a multiple 2.5 you wipe out the 'top up' factor.

So this begs the question, will the yield improve by 250% between 1996 and 1997?

I have a feeling that current projects being planted now could absolutely meet this sort of target and then some. But I think that 1997 would be nowhere near it. Each year probably improves upon the last..

regards

pch

p.s The more I think about it, the more GTP reminds me of characteristics of a LIC like Argo investments. Buying below the NTA and selling when it is over a certain premium is perhaps not a bad way to play GTP.

 

[Jackob]

Pch and Portfolio,

Thank you both for your comments.

I think the $4,300 figure is the return from the 1996 project (delivered in 2007). So i suspect the answer to your question is #2 - its bad so they dont want to talk about it. Not sure where i read that though …

I agree.

I found the 2005/2006 returns (for 1994/1995 growers) at

http://www.great-southern.com.au/default.aspx?MenuID=418

They were both the same of $5,148/woodlot (after “propping up”) on an initial investment of $3,300/woodlot (including 10% GST) over 11 years. So the compound returns was both of ~4.1% pa.

Thus the $4,300 figure indeed looks like referring to this year’s return on an initial investment of $3300/woodlot (not $3,000/woodlot I used - sorry). The annual return was then a mere ~2.4% pa (after a likely “propping up”). This 2007 return is bad, so few insiders want to talk about it and few outsiders would know.

Now let’s assume that the later/future harvests will produce 3.2 times as much woodchips as the 2005 harvest. Then they will reach 4.1% pa return rate, the same as 2005 (in which year the returns were “propped up” by 220%).

Now we will have a 47% increase of application fee from 2008 onwards, the woodchip crops will need to be (3.2 times)*1.47=4.7 times as big as the 2005 crop to reach the same 4.1% return … but this 4.1% pa return will still be too hard to attract new growers.

… If we need produce a decent 10% pa return, then the woodchip harvests need to be raised to 8.6 times of the 2005 crop…

... latest acquisition (ASX announcement dated 05/11/07):

They bought 14,700 hectares of hardwood plantations for $47.3 million. And the plantations were established "between 1993 and 2003".

So these lands are worth $47.3m / 14,700ha = $3,218/ha, including trees on them and a 50% ownership of a woodchip mill. Although these lands are under “profit a prendres” with 28 year leases (14-24 more years left), it still sounds unbelievably cheap!

Based on these data supplied in the announcement (5/11/2007), I estimated that the true value of the clear freehold lands should be not more than $3500/ha or so, which is about only half of the $7000/ha price GTP used to purchase the “pulpwood” lands.

Why so cheap? I suspect this is because of a sudden drop of demand on pulpwood lands by GTP, TIM and other MIS companies in last 12 months or so. This may be consistent with the earlier complaint in the rural area on the skyrocketing land price due to those MIS buying. This may also be confirmed by recent independent valuations on ANE’s lands of ~$3000+/ha (according to my memory only, in ANE’s announcements fighting against GNS’s takeover).

A cheap land price will help to reduce GTP’s CAPEX, but it would cause other serious problems, such as reducing NTA and earnings (land appreciations/depreciations have been already included in earnings).

 

[Portfolio]

Hi Jackob,

From my reading of the announcement they havent bought the land - just the trees on them. Hence my calculations above. From the wording "to use for its own resource as well as for use in its managed investments projects" I expect they will just throw the proceeds into the pool to continue "propping up".

 

[pch]

Gents, can you check my math?

Taking into account the $5148 top up return to investors.. and based on the bone dry tonnes price of $180 would mythically yield 28 tonnes per woodlot

5148/180 = 28.6

then

"Gross proceeds (calculated by multiplying the volume produced in cubic metres by the basic density of wood divided by 1,000, adjusted for physical losses), to calculate bone dry tonnes, which is then multiplied by the prevailing woodchip price for the relevant plantation hardwood species"

"Basic density for Eucalyptus globulus at harvest is in the vicinity of 550kg/m3"

28.6 / .55 = 52 m3

Now even before we factor in the fact this is not the 'real' yield, but a mytical yield assuming the top up never needed to take place.

But to my uber untrained eye, even this 52m3 mythical volume seems smallish for a 330 square metre woodlot?

Now all we need on this forum is some tree husbandry expert that can tell us how much volume you would get out of a big, thick 11 year old Eucalyptus tree. Rainmaker don't suppose you are a lawyer come tree hugger?

 

[Jackob]

Pch,

Your math is correct except the size of 1 woodlot is 0.33 ha, which I reckon should equal to 3,300 m2, not only 330 m2 (1 ha = 100m x 100m = 10,000 m2, am I right?). So to produce the required 52m3 bone-dry-tonnes woodchips would be even easier.

But the question is that, if the lands could make at least $5148/woodlot return in each 11-year rotation, how would they be leased out at only $3218/ha, or $1073/lot, on 28 year contracts (~18 years on average still left) including ~5-years-old trees already planted on them. Wouldn’t the sellers all be mad?

No. My judgement would be that those lands leased out for ~18 years at only $1073/lot could never produce $5148/lot in one round of 11 years. They could only make ~$1000/lot at most due to their poor qualities.

Then what to do with them? Well, I would suggest GTP doing nothing except selling them to growers at $3000/lot immediately and get ~$2550/lot cash after deducting ~15% commissions. Then put the $2550/lot directly into banks to reduce debts with 10+% pa interests. Thus in 11 years this ~2550/lot money would become $7275+/lot, from which after paying growers $5148/lot, the $7275/lot - $5148/lot = $2027/lot left would become GTP’s real profit.

Isn’t it good? Can’t it be called “Maximum cash flow at Minimum/zero cost” or “Doing nothing is better than doing anything - Stupid!” Hahaha!

 

[pch]

duh pch bad maths srikes again!, but yes you are right if I'm whinging about volume 52m3 derived from 330 m2 then i really wonder about 3300 m2

I don't quite follow your post (you're talking about the most recent aquisition? I haven't even considered that sorry).

I'm now interested in volume generally, so knowing how much volume you could expect out of a woodlot would help answer the topping up issue as well as the real physical limit to yield per woodlot.

Its just that I don't think that threes spontaneously got 3 times thicker from 96 to 97, irrespective how good their staff were when they insourced it. But over 10 years? based on my calculation those first 3 years were particularly skinny trees and it *appears* that there is considerable room for increased densities.

 

[Jackob]

Pch,

I indeed thought you were talking about the acquisition, but you were not! Sorry for that.

How much woodchips a woodlot can produce is a question which defines whether the growers’ investments are good or not. Obviously, even a $5148/lot return on a $3300/lot capital in 11 years (4.1% pa), is not good enough for most investors (the problem was that they didn't know it beforehand).

As to the other question of GTP’s own short/medium-term survivability or profitability, it is determined by whether its income, or growers’ application fee ($3000/lot for the pulpwood project) can cover all GTP’s cost (including, commissions and promotions, seedlings, tree husbandry, office overhead, tax, debt interests, and etc). According to our discussions earlier, the answer was “NO” to the question. Luckily, this answer has now been confirmed by GTP’s decision last week to increase application fee from $3300/lot (including GST) by a hefty 47% in 2008.

Apparently, GTP has to put its own survivability ahead of investors’ profitability. Survive the company first, then investors' returns would only be possibly shown 11 years later (who cares?!).

 

[pch]

Apparently, GTP has to put its own survivability ahead of investors’ profitability. Survive the company first, then investors' returns would only be possibly shown 11 years later (who cares?!).

Thats precisely what I as heartless nasty shareholder expect them to do! Did I mention I have never actually invested in their retail products?

Operational cashflow figures from the last 2 years suggest they have been doing okay managing expenses - compare to Timbercorp.

I agree with your assesment I think they are now likely leasing, but I wouldn't see them switching to leasing as a failure in strategy as such because they will still greatly benefit from this going forward. Although they will still have a requirement to lease land, much of it will come via rotation which should improve their ROE.

For me, it all comes back to volume per woodlot. Once you know that, you can put the whole propping up issue (and therefore ongoing sustainability) to bed.

Maybe my view of potential volume is somewhat clouded by a 20m high massive lemon scented Eucalyptus I have in my backyard

 

[Jackob]

Judging by the fact that GTP has to raise its pulpwood MIS application fee by a lumpy 47% to increase its “income”, the project must be in a quite difficult financial situation.

On the other hand, such a dramatically increased upfront fee would have to scare off investors, thus the real intention of GTP might just be to wind up its money losing pulpwood business.

 

[Jackob]

An article in The Age today:

http://business.theage.com.au/agribusiness-tax-policy-the-stuff-of-pure-fantasy/20071207-1fqt.html

 

[barnz2k]

im trying but not following all this very well..
Anyone care to make a simpletons summary of the current situation?
been 4.5 months since it was last at $2.50! been dipping under $2 recently

 

[Rainmaker2000]

I can confirm I'm a lawyer, tree hugger and many other things but no botanist..........that article sums it up......Silly government policy made just worse by retaining it.....I saw much of it when I worked in govt.

I appreciate all the sums you guys are doing.......one thing you may consider about land valuation which is key to my investment in TIM........the plantation land is not just for planations....infact as the MIS critics point out, plantations are the least economic and efficient use for the land....if you believe the farmers who have to bid for land against MIS, planation land with its high rain fall and proximity to ports is by definition, the best of the best farm land.....I am thus of the school of thought that the massive inflation of 'hard commodities' is leading to a boom of soft commodities with the large agriculture landowners being the next 'infrastructure players.'..........you may wish to note the current float of 'PrimeAg'

As for the share performance of GTP and TIM, I find the downtrend a little perplexing since the perception now seems to be that the sector will win its MIS case........Dare I say it though, I think TIM has hit bottom as they have pretty much admitted their spending spree is over and now they are just going to let the annuities role in

 

[pch]

im trying but not following all this very well..
Anyone care to make a simpletons summary of the current situation?
been 4.5 months since it was last at $2.50! been dipping under $2 recently

Here's my summary..

If you do the math and do not include tax benefits as Jackob has done, the returns are crap on MIS plantations. The crux of the argument is if you take out the tax benefits, the industry wouldn't stand on its own.

But as an investor in the woodlots, you can claim up an front deduction and then claim additionally claim interest on the remaining (if you borrowed to do it), you can in effect pay less than half the upfont fee.

This has the effect of increasing the 'return'.

So critics rightfully argue that if it wasn't for the tax benefits there would be no MIS industry.

But while this has been happening, the MIS companies now own some very good assets, that unlike most assets a company owns, should retain their value going forward. Currently the market has little confidence in these companies because of a variety of reasons, but their share price right now is around or below the value of those assets.

You have to make a call on how much value these companies can get on these assets later (ie return on equity).

 

[Jackob]

I once read in a newspaper that CEO John Young said that, either with or without tax benefits, the MIS investors within top and zero marginal tax-brackets both enjoy the same return rate. This is because the distributions to the investors are all taxable at their marginal rates. In other words, the tax deducted at the beginning of the scheme is only deferred.

(In such situation, the high incomers enjoy effectively zero tax rate as the poorest. That’s why the schemes are in favour with the rich.)

Thus, if a scheme returns only say 60% of the capital to the investors, both the rich and the poor both get the same 60% of their capital after tax (both lost 40%).

So a reasonable return rate (say at least +7% p.a.) is vital to all the MIS schemes.

 

[Austravel]

Hi,

Do you know if anyone has worked out the real rate of return from the latest timber plantation harvests for Timbercorp, Gunns etc?

I've tried to track down info but to no avail. I have a few plots with them and ITC. Now with hindsight don't believe I should have gotten into them.

Thanks

 

[Jackob]

Hi Austravel,

It looks like no one knows the numbers you asked, or people who know them don’t want to tell you!

Not a good sign.

My guess is that the “real rate of return from the latest timber plantation harvests for Timbercorp, Gunns etc” will be quite poor, so that the companies and insiders don’t want to talk much.

 

[barnz2k]

PCH - cheers for that!

Seems like even if they do come through strong its going to take a while before this happens. Seems to hold around the $2 mark.. tempting to get a few at $2 to reduce avg buy price and have an earlier sell option in the event of a short rise.