GTP - Great Southern Plantations

[Junior]

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.

You need to take into account the time value of money, if you invest your tax savings elsewhere (eg shares) and it returns 10-20%pa, or if you use the savings to pay down your mortgage, then you only need a modest return from your MIS to make it worthwhile.

Also if you're a high income earner at the time of investment but then become retired by the time of harvest that adds to the tax effectiveness.

 

[Jackob]

... if you invest your tax savings elsewhere (eg shares) and it returns 10-20%pa, or if you use the savings to pay down your mortgage, then you only need a modest return from your MIS to make it worthwhile.

Hi Junior,

I happened to hear some similar stories of the extra “tax savings” years ago in GTP investment seminars. Did you get the story at similar occasions, too?

Now let me explain to you the story.

Assume you have $10,000 to invest in a pulpwood scheme. After tax deduction, you have $4000 back (assume your tax rate =40% for simplicity). Thus you actually have only invested $6000 in the pulpwood scheme, and you have $4000 “savings”.

11 years later, you will get a total return say $11,000 from your original pulpwood investment of $10,000, at the same return rate as all other growers, but because all the returns are taxable now, you will get $6,600 after a 40% tax. This represents a $600 profit, or an annualised return less than 1% pa on your original $6000 investment. Fair enough!

Now, what will happen to your “saved” $4000? Well, that $4000 “saved” money I reckon is not real, as you never really get it in your bank account.

Let’s now have a close look at your bank account with this respect. First your withdraw $10,000 from it to write a cheque to GTP, and then immediately get a $4000 cheque from the ATO for the TAX deduction. So at balance, your account is purely reduced by $6000 (not increased by $4000). At the end of the 11 year period you have the $6600 investment return back to your account, so you have earned $600 with a annual return rate close to 1% - Good luck – and this is the end of the story.

(But if people all know this result in foresight, why not put their $6000 directly into the share market to earn 10-20% pa in the first place instead of MIS? - This is one main reason I reckon why the MIS sales have to shrink year by year.)

 

[Junior]

Hi Junior,

I happened to hear some similar stories of the extra “tax savings” years ago in GTP investment seminars. Did you get the story at similar occasions, too?

Now let me explain to you the story.

Assume you have $10,000 to invest in a pulpwood scheme. After tax deduction, you have $4000 back (assume your tax rate =40% for simplicity). Thus you actually have only invested $6000 in the pulpwood scheme, and you have $4000 “savings”.

11 years later, you will get a total return say $11,000 from your original pulpwood investment of $10,000, at the same return rate as all other growers, but because all the returns are taxable now, you will get $6,600 after a 40% tax. This represents a $600 profit, or an annualised return less than 1% pa on your original $6000 investment. Fair enough!

Now, what will happen to your “saved” $4000? Well, that $4000 “saved” money I reckon is not real, as you never really get it in your bank account.

Let’s now have a close look at your bank account with this respect. First your withdraw $10,000 from it to write a cheque to GTP, and then immediately get a $4000 cheque from the ATO for the TAX deduction. So at balance, your account is purely reduced by $6000 (not increased by $4000). At the end of the 11 year period you have the $6600 investment return back to your account, so you have earned $600 with a annual return rate close to 1% - Good luck – and this is the end of the story.

(But if people all know this result in foresight, why not put their $6000 directly into the share market to earn 10-20% pa in the first place instead of MIS? - This is one main reason I reckon why the MIS sales have to shrink year by year.)

I understand the situation you're explaining. I am assuming that you borrow the initial amount, therefore you do have the $4k to invest. I'm also assuming a better return than 1%. That's why you have to DYOR when deciding which scheme to invest in.

 

[Jackob]

I reckon no matter whether the money is borrowed or not borrowed, if you invest in 3 GTP woodlots (1 ha) with a nominal $10K, you actually only paid $6K and get returns from this 6K, not from the $10K (after tax).

A common mistake is that people don’t know their distributions are all taxable, ie, they are misled to believe the first $10K of their distributions will be tax-free, so they think they have got $4000 extra free money.

 

[Portfolio]

Junior is partially right - MIS can work as a strategy in some situations - even if the client never gets $1 back. Heres how:

Take an aggressive property developer. These guys typically - leverage any equity they have very aggresively (90% LVR) and believe they can earn a high rate of return on their equity through developments.

Now lets say a property developer does a development and makes $1,000,000 profit. Assume this is in a company structure the developer has 2 options. Either

Option 1. Pay the tax ($300,000) OR
Option 2. Invest $1million into MIS with a $1million loan from the provider (GTP does offer this) The developer can pay GTP interest only for the first few years (say 3 years).

Therefore:

Option 1. -$300,000
Option 2. $0

The client can therefore use this extra $300,000 cash and borrow against it at 90% lvr to invest in another $3,000,000 investment. If the developer can turn this project around in 3 years (turning the $3million into $5million) the extra $300,000 in the clients pocket has effectively made them this extra $2million. The fact that they lose $1million on the Agri (assuming $0 return) is irrelevant. They are still $1million better off. All they have had to do is pay GTP 10% pa on the loan ($100,000pa which is tax deductible so $70,000pa. after tax).

HOWEVER while this works for some clients and is very lucrative for the planners that understand this the majority of investments are not sold under this strategy. I suspect most financial planners expect unrealist returns.

Hope this helps.

 

[Jackob]

Hi Portfolio,

I might be wrong, but your example still looks familiar to me. It still sounds like from a GTP promotion pamphlet.

Your example highlighted how a property developer could utilize the $300,000 tax return (30% on the $1,000,000 MIS investment) by gearing it up 10 times to $3,000,000 and make money on that $3,000,000 at a very high return rate for 3 years. Thus in this example, if the person could make any money, it was largely because his 10 times gearing strategy in a highly profitable investment, which was nothing to do with MIS at all.

Also in this hypothetical example, the real cash available for gearing should not be $300,000, but should only be $200,000, as $100,000 (10% on the $1M) were needed for GTP loan deposit.

The most strange thing of all was that, if the investor had got $1M pre-tax profit, why should he has to invest in MIS to get $300K tax return and then to gear up? Why shouldn't he directly gear up the $700K profit (after 30% tax) to $7m to earn much more money at a lower risk?

 

[Portfolio]

Hi Jackob,

Unlikely its off any pamplet as from my observations 99.9% of planners sell MIS expecting a commercial return which both you and I agree will not come.

1. Your 100% right. The advantage comes from gearing the property project at lower interest rates however for property developers that i know getting the equity (which as illustrated you can do through MIS) is always a problem.

2. Your not right on the @200k front though. They can be 100% borrowed. You might be referring to having to pay the GST but this immediately (next BAS) claimed straight back from the ATO therefore the client is still $300k cash-flow better off.

3. On the last point you are right. They do use the $700k profit to re-invest but as i said above these types constantly re-invest all sales proceeds into the next development forgetting about the tax they have had to pay.

So what i am basically saying is - I agree that anyone that invest expecting a commerical return is kidding themselves BUT GTP get sales through the structure of MIS. The same scenario above could be used for share traders / future traders that might expect a high rate of return.

Remembering that if it is done inside a company and the developer loses it all on the next project they will probably default on the GTP loan. However through the wonderful world of securitisation most of these loans are "packaged up" and sold to the unknown debt buyer (they are not on GTP's books).

 

[The Captain]

I think we are going to see below the $2. My target is $1.80 where I think it will have to be re-assessed. The weekly chart shows Elliot Wave and it is looking towards this level of $1.80 beore we see a retracement to the $3 previous levels. It shows that the wave 5 ($1.80) may come in around 26th November. Remember these are my own thoughts and you should do you own research.

Well my timing was out but my target of $1.80 has now just about to be reached and broken. Where will the price of this stock go now? Both Weekly and daily charts look like heading south. Daily showing a strong trend now starting to push this one lower. Weekly chart also beginning to agree. Maybe its all that positive talk about this stock from Jackob (LOL). I cant see this share price rising any time soon. But like others mine is just an opinion and you should not take it as a recommendation to buy or sell this stock. Do your own research.

 

[barnz2k]

shyt. what a drop.
been busy and couldnt check it. firmly below $2 now..
what to do what to do.....

 

[Jackob]

... Maybe its all that positive talk about this stock from Jackob (LOL). ...

The Captain,

Thank you for your compliments, but I don't think I would have such a power. LOL.

Agree that GTP won't come back any time soon.

 

[pch]

More info on the 1996 harvest

http://gscentral.great-southern.com...=document&ID=71415&ObjectType=3&ObjectID=8587

Key points:

$4102.08 return per woodlot below expectation
prospectus volume 250m3, actual 197m3 (20% below)
expenses $50 per tonne above forecast
5.5% managagement fee waived from final result
woodchip price below inflation (1.4% vs 2.6%)

I know there will still provisions in place for propping up the 96 project but waiving the management fee is just another way of doing provisions. (I forget how much though).

I wonder if they think that from 97 onwards dropping the management fee will give them enough room to avoid the prop ups?

So, hows about those GTP managed funds then!

 

[Rainmaker2000]

I must say, it was with particular amusement that I read your attachment on the recent 96 harvest and I think of how brave The Captain was, who has been the only participant on the thread for a while to subject himself to the devils advocate position on this company.......

I was shocked when I first took an intensive look at GTP about one year ago, that so much of their business comes from repeat 'customers', amazingly this includes current management.......they really are believers...

You can see why the Mums and Dads continue to be shystered.....after I read this attachment, I get the feeling that GTP is about to save the world or something and you can make a contribution too....

Unfortunately, there are just moments when the bull**** creeps through the marketing........for example, "to provide an improved outcome for
growers the Board of Great Southern contributed to the 1996 project to the equivalent of raising yeilds to the initially targeted level of 250 m ³/ha."

In other words, your project failed and we are propping it up so you go with us again.......oh and by the way, we are waving our management fee and giving you 10% off..hehehe..........Would you buy from such a desperate sales person?

 

[Junior]

They're not all bad:

FEA Plantations is scheduled to distribute the final harvest dividend for its inaugural 1993 forestry managed investment project1 in May 2008.

Current forecasts indicate the Project will deliver a pre-tax return of 12.4% per annum and an after-tax return of approximately 7.5% per annum to grower investors2.

When the thinning and estimated clearfall harvest proceeds are discounted back to 1993 dollars, the total anticipated return is approximately 50% higher than original 1993 dollar Prospectus estimates based on the assumptions of a yield of 375 tonnes per hectare at age 15 years and a selling price of $20 per tonne.

 

[Aussiejeff]

Todays Annual Report had very negative overtones in the first three paragraphs.... lots of "challenging", "disappointment" etc. Followed by the even worse news that GTP had a massive 47% drop in net profit before tax (down from $133 Million last year to only $71.5 Million this year).

That can't be good for the share price today. I'm glad I got out at $4.55, many moons back when they first announce they were "diversifying" into cattle and grapes. At the time of the announcement I thought that was the stupidest thing they could do and immdiately sold off my holdings. Phew....

I guess all shareholders can do now is pray for heavy rain over the coming 12 months. Best of luck.


AJ

 

[Rainmaker2000]

I sure know where you are coming from AussieJeff and I can't say for sure, but $4.55 is looking like a reasonable exit point at the moment!!!......just from memory was that around the price GTP was offering a share purchase plan to its loyal flock....you got to love a company which shows its own shareholders a lot fo respect.....

Funny thing, I thought the cattle and grapes was a dicey move initially, but in retrospect the move into cattle has been the most lucrative thing GTP has ever done........of course except for the upcoming change of legislation.........I'm still of the view there is value in this sector mainly for its finite assets but it is more than testing the patience

 

[pch]

Interesting listening to his boardroom radio interview and this quote in the annual

"From a cash flow perspective we believe the new pulpwood forestry project will deliver significant cash flow benefits from the end of 2007/08 onwards as land acquired for the project is on sold to investors."

Would this be the source of the big fee increase? Seems to me that while this will impact the balance sheet, it is actually not a bad move going forward because it adds an extra dimension to MIS returns that makes it easier to market.

comments? Anyone know exactly how it works?

 

[BuyandHold]

I'm intrigued by the focus on the returns from GTP MIS projects.

Now of course some investor return is required in order for GTP to prosper. However ultimately the returns to GTP investors (as opposed to MIS investors) depend upon the ability of GTP to sell its MIS and funds to investors.
Hedge funds, banks, insurers and virtually the entire financial sectors have ripped off their customers at various times and to varying degrees in recent times. Particularly hedge funds, charging absurd annual fees and performance fees in the 20 - 25% region. GTP offers a pretty decent product in comparison to some of the rubbish offered in recent times (e.g. Fincorp, Basis, Absolute, Grange, Westpoint and now even LPT's of late).

 

[pch]

It's partially academic I agree, but it is worth analysing nontheless. Now though that we have had returns for 3 years, whether the MIS marketing machine can as easily convince a new generation of investors to part with their money is an interesting question.

 

[Rainmaker2000]

I have to agree that Mums and Dads will keep buying as long as the advisors are paid so much to sell them!!!

But it is for good reason we focus so much on investor returns for MIS products.

a) If the investors don't make a return, these MIS companies will prop them up with shareholder funds..like GTP and TIM is not passing on all water liability this year......they obviously know how important the returns are

b) If MIS does not exist, these businesses themselves then need to use their assets to make returns for themselves, not their investors.......so it actually makes good sense to have real assets making real returns

I hold a position in TIM precisely because I think the assets have a sound future outside MIS

 

[pch]

Hmm, Australia looks set for another big score in the cricket..

anyhoo

I have a mate who's a financial planner (don't hold it against him) and he told me some time back that GTP's timber stuff was one of the most 'expensive' on the market. But he did go on to say that he felt their cattle stuff was actually pretty good. For all of our talk on the forestry, I must confess I've not delved anywhere near as much into the cattle project.

In relation to your comment on assets, I no longer hold TIM (and at present anyway, do not regret it , but as mentioned before I do like the fact that all of these companies buy appreciative assets that are not intangible. It's a nice combo. But if you are talking specifically about assets that have potential outside of MIS, how does the cattle projects compare?

Another project that we need to look into this year is the high value timber project. From an MIS point of view, that one takes much longer than the 10-11 years of the Blue-Gum. They closed oversubscribed didn't they? With a longer time-frame, combined with the 'certainty' of the up-front tax deductability, how much of a growth area is this? I mean, by the time we are all in a position to analyse returns some of us may be retired!