The market has been kind to Gunns this week, marking the timber company's shares down by just 32 per cent since the surprise announcement that net profit tumbled by 98 per cent to $420,000 in the first half due to weak woodchip demand out of Asia and currency pressures.
With no improvement in operating conditions on the horizon, and little investor confidence in the company's ability to manage its assets, the survival of Gunns is in question. The company has just four months to deliver a solution before bank covenant breaches, with ugly consequences, become a possibility.
The company is pinning its hopes on a planned corporate reorganisation into four divisions in a bid to attract investment into its long-delayed $2 billion Bell Bay pulp mill and to highlight the underlying value of plantation assets. The challenge of completing the restructure and attracting external investment is out of step with the tight timetable, so its management and advisers from Nomura Australia should not be expecting much sleep between now and the end of June.
Shareholders turning their minds to disaster scenarios may take some comfort from the value of assets on the Gunns balance sheet. The company's plantation assets have a book value of about $1.2 billion, while debt and hybrid securities total about
$780 million. Therefore, even without attributing value to the Gunns operating businesses in woodchips and sawn timber, shareholders would share in about $420 million of net assets (about 52c per share, a little shy of the current share price of 58.5c) on a winding-up, provided that the plantations can be sold for book value.
And there's the rub. With the woodchip market in the doldrums, buyers are unlikely to place full value on the plantation assets without a nearby pulp mill.
Watch out below.
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