Gunns finances: an analysis

John Hawkins

Gunns assets are given as 2.6 billion dollars in part backed by their land bank of 250,000 hectares containing at their valuation 500 million dollars worth of trees this backs their debts of 1.3 billion dollars (after the recent capital raising). The crux is how the land is valued, Gunns MIS land bank has a sitting tenant in the form of a growing tree who pays little rent for up to 20 years, I suggest that this makes the land impaired if not unsaleable. If one gives the land a value of $2,000 per hectare the land and trees are worth 1 billion dollars, not as suggested by Gunns in excess of 2 billion dollars, a serious, if unaddressed problem, at a time of falling asset values across all sections of the property market.

Dear Sir,

On the subject of Gunns finances as portrayed in the Annual Accounts:

I have read Gunns Annual Accounts with particular reference to the company’s assets at (ASX GNS) and note the following.

Gunns assets are given as 2.6 billion dollars in part backed by their land bank of 250,000 hectares containing at their valuation 500 million dollars worth of trees this backs their debts of 1.3 billion dollars (after the recent capital raising). The crux is how the land is valued, Gunns MIS land bank has a sitting tenant in the form of a growing tree who pays little rent for up to 20 years, I suggest that this makes the land impaired if not unsaleable. If one gives the land a value of $2,000 per hectare the land and trees are worth 1 billion dollars, not as suggested by Gunns in excess of 2 billion dollars, a serious, if unaddressed problem, at a time of falling asset values across all sections of the property market.

The land bank has three future potential uses; firstly if the bottom drops out of plantations and the decision is to return to farmland it has to be de-stumped, ploughed and sown all at enormous cost, alternatively the trees can be left as a carbon sink or thirdly the trees are harvested and replanted. All three uses involve a considerable cost which is difficult to reconcile with Gunns current valuation of 250,000 hectares at $6,000 or $1.5 billion.

Under accounting standard AASB 136 which outlines the values for an impairment test an asset cannot be carried on the balance sheet at more than its recoverable amount. If an asset is valued above the recoverable amount a write down must occur and a loss must be booked through the profit and loss statement.. It should be noted that Great Southern Limited (ASX GTP) are buying back their first MIS plantations, presumably so as to prevent any losses being crystallised by this investment and thereby possibly undermine the confidence of potential new investors. To illustrate their concerns I use a phrase from GSL’s July announcement to the ASX which illustrates the problem “… to maximise the value of its significant land bank the removal of MIS project leases provides the flexibility to use the land and assets in the most value accretive way.”

Next when Gunns in one year increases the value of its intangible assets by a factor of 15, to 50 million dollars, accountants smell trouble, for this is an asset over which banks rarely lend, further if the Pulp Mill does not go ahead the capitalized costs will have to be written off against the bottom line making an $80 million dollar plus hole in next years profit, we will then be entering interesting times.

I read with interest the article in Saturdays Mercury on the subject of Gunns, John Gay, and his house building activities in Launceston as reflected in these Annual Accounts. (page 83)

Their correspondent failed to note that the Annual Accounts state that at the end of the 2008 financial year Mr Gay owed his cash strapped company $366,000 for building work performed on his house, I suggest that by using a public company as a bank the Chairman and Chief Executive Officer is setting a very poor example.

I raised the subject of a similar non payment of a house building account, due to the firm by the then Premier, Paul Lennon, at the Gunns AGM some 2 years ago. I was told by Mr Gay that the account had been in dispute, but that this dispute had now been settled.

Mr Gay’s debt to his firm has now been settled, however I do not envy the job of the auditor having to raise the subject for inclusion in the Annual Accounts under Directors Disclosures.

John Hawkins
Chudleigh