Gay, Gunns and the stock price

Alex Wadsley Time for Gunns to go head-hunting

GUNNS’ share price hit $2.67 at the close Tuesday, driven down in part by the massive fall on Wall Street, but while the rest of the market sneezed, Gunns fell off a cliff.

This may have something to do with the latest murmurings on the pulp mill, where a $1 billion rights issue is being mooted to cover the weak reception to debt financing the mill. While considerable praise must go to Paul Oosting for coordinating the Wilderness Society’s campaign against ANZ, this is only one of a triple bogey of problems that stand in the project’s way. The others are the credit crisis and the fact that the current project is a dog.

With the 8% fall on Tuesday, Gunns lost almost $100 million in value. If it is looking to raise $1 billion it will need to issue 400 million new shares (assuming a $2.50 rights issue price, a 6.5% discount to Tuesday’s close). This will dilute current shareholders in half. The pathetic 3.4 cents earning per share in half-year Dec 2007 would become 1.7 cents.
Hardly value creation!

Gunns is betting the company, and asking shareholders to double-up or be diluted.

The Australian Financial Review recently reported an ABN AMRO analyst as valuing the existing Gunns business at $3.30 a share and the pulp mill at $1.30 a share. Given the high oil prices my own feeling is closer $2.85 and nothing, but which ever way you look at it, paying out $2.50 to build Gay’s folly looks pretty unattractive.

It is time for Gunns shareholders to start looking for a new CEO. John Gay is yesterday’s man, ill equipped for dealing with brand and corporate responsibility or, it seems, high finance. He should follow Paul Lennon into retirement.

How can shareholders have confidence in investing in a pulp mill when it seems that John Gay and fellow director Robin Gray have turned it into a personal vendetta against Bob Brown, Christine Milne and the green movement? I’m not a strong believer in triple bottom lines: profits are the focus of business and social and environmental regulation is the responsibility of government. But a 21st century business leader cannot be deliberately antagonistic to such issues. He cannot assume that just because the Premier is his mate, he will be able to build any anything, anywhere. Building community support is not tree-hugging, it’s good business.

If Gunns had moved quickly with its original proposal, a plantation fed, totally chlorine free mill in Hampshire, focusing on getting together a fixed-price construction contract and financing before the credit crisis struck then this would be a different story: the story of a savvy and plucky businessman once again beating expectations.

Instead we have a share price that is more than 15% below the price the company traded at when the concept of a pulp mill was first announced in June 2004 ($3.30 per share). Four years and going backwards! Profits are falling, from some $100 million per year June ’05 to $75 million in June ’07. Leverage is too high, and this is at a time when the cost of debt is increasing and companies with high debt levels are finding difficulties refinancing.

Gunns is a major Tasmanian company, and with the right leadership could be a major contributor to Bartlett’s clean and clever economy.

With a fresh outlook, Gunns could be well positioned to capitalise on the resurgence of the rural economy with high agricultural prices. While high oil prices and carbon costing should be the death knell for old-growth clear felling, cellulosic ethanol from plantations and other green waste could be the future for transport fuels.

Most importantly Gunns needs a brand makeover and a clear strategy. Its profitability is almost wholly dependent on tax-driven Managed Investment Schemes, it’s high in debt and its businesses are too diversified. Is owning wineries, wood chip mills and a construction firm really the best way of maximising shareholder returns?

With a new CEO we might find out.