Gunns suffer as profits go walkabout
Gunns Ltd’s first half profit slumped 98 per cent as the woodchipper moves to restructure its operations and secure long-awaited funding for its controversial Bell Bay pulp mill reports Business Spectator.Gunns on Monday posted a net profit for the six months to December 31 of $400,000, down from $33.6 million in the prior corresponding period, as a downturn in Asian markets, a strong Australian dollar and the collapse of several managed investment schemes adversely impacted its bottom line.The news sent the timber company’s stock into a tailspin, with the shares tumbling 22.15 per cent to close at 68.55 cents.
Gunns said the market for its core product - hardwood wood fibre - had been impacted by a prolonged economic downturn.
At the same time, opportunities for growth and consolidation had arisen in plantation management and sawmill operations.
Gunns also said that the value of its investment of more than $1 billion in land and trees had gone unrecognised.
Reshaping the company
Gunns therefore had decided to reshape the company “to realise value in the group’s assets and participate in growth opportunities”.
The restructure would include the creation of a separate investment vehicle to facilitate direct investment in its plantation forestry estate, which would enable the market to more appropriately value the forestry assets.
It would also enable the expansion of the hardwood forestry assets across Australia and allow Gunns to maximise its investment in the pulp mill at Bell Bay in Tasmania.
Gunns said a more compelling investment structure would help in closing the financing arrangements for the pulp mill.
The restructure would also establish a stand-alone timber-processing business.
“Advisors have been appointed to fast-track this restructure which, although complex, should deliver significant shareholder value if executed in a timely manner,” Gunns said.
“Of critical importance is achieving financial close in relation to the pulp mill.
“The board acknowledges that this uncertainty must be removed.
“A market update in respect to the progress of the restructuring initiatives will be provided in late April 2010.”
Bell Bay mill “project ready”
Gunns said the Bell Bay pulp mill project was being held in a “project ready” status so construction could start upon financial close.
“Negotiations with Sodra, the Swedish forest products co-operative, are continuing in relation to them becoming an industry-based equity partner,” Gunns said.
“Investment interest in the project has also been received from a number of purely financial investors.
“Negotiations with these parties are proceeding, and the company has appointed a financial advisor to bring the equity investment round to a close.”
Gunns said market conditions for the wood-fibre business were expected to remain weak but a gradual improvement was expected through the 2010 calendar year.
The value of the Australian dollar would be critical to determining competitiveness to supply Asian markets in the second half.
Demand for timber products may increase as construction activity recovers, while earnings from the company’s role as manager of the Great Southern forestry projects would increase during 2010.
“The company expects significant earnings improvement and the reinstatement of a dividend payment in the second half,” Gunns said.
The outcome of woodchip price negotiations for the 2010 calendar year would play an important role in the company’s full year performance.
Tough competition
Gunns said that in the first half, a stronger Australian dollar impacted its competitiveness in Asian markets, and its major woodchip market in Japan was weakened by the global financial crisis.
“While the Chinese market is growing, pricing remains highly competitive due to the strength of the Australian dollar and short-term surpluses of low-priced competing products,” Gunns said.
Wood fibre revenue in the first half dropped by 38 per cent to $140.6 million compared to the previous corresponding period, while timber products revenue fell two per cent to $127.7 million.
Gunns’ total first half revenue fell 24 per cent to $325.9 million.
The company did not declare an interim dividend.