Image for Strategic review…. or yet another downgrade?

Readers of our mainstream news media could be forgiven for not having a full understanding of everybody’s favourite timber company’s latest ASX release.

The focus of both Tasmanian dailies was on the announcement that the pulp mill project would be spun off into a separate company.  But is that really news?  It has never been a secret that Gunns has been peering under every venture capital doormat in Europe and Asia looking for a JV partner for the past two years.

Typically, The Examiner put a positive spin on the Gunns release, giving it four pages coverage no less.  Along with the usual comments from Mr Eastment (who last time I looked was a pulp and paper analyst, not a stock market analyst), The Ex wheeled out other commentators, who enthused about Gunns, ensuring a seat at the next corporate dinner? (if Gunns survives long enough, that is.)

The share price will start recovering on Monday, we were assured.  Proper analysts don’t agree.  Prior to market opening on Monday, Deutsche Bank dropped their target price from $0.83 to $0.60.  Shortly after that, JP Morgan’s target fell from $0.79 to $0.63.  Others are looking at the numbers, pondering how accurate the latest profit guidance is.

Less than two years ago, Gunns went cap in hand to institutions and private investors looking for money to patch a bleeding balance sheet.  In an institutional briefing, 2008/09 EBIT was tipped to be more than $200 million.  Yes John, there really are fairies at the bottom of the garden.  When the audited figures appeared a year later, surprise surprise.  EBIT of $110 million.  A credibility problem starts emerging here.

Confirming my suspicions that there may indeed be fairies in Gunns’ patch, 2009/10 EBIT is now forecast to be $30 to $40 million.  That’s a big drop from $110 million, but The Examiner wasn’t too worried.  The big problem, we are warned, is that Gunns could relocate to The Mainland.  Clearly this is a Very Bad Thing, as analysts and institutional investors would be able to keep a much closer eye on things.  So would the ANZ.

Even should they scrape enough earnings together to meet the latest target, that’s hardly enough dollars to fund a pulp mill, even a teeny little one.  It would also return earnings to the level of a decade ago, before Gunns started buying up every timber related asset that came on the market.

But given their history of meeting earnings guidance, I doubt they will even achieve $30 million.  I’m tipping $15 million tops.

Love Jarvis xx

PS: 0953 [Dow Jones] STOCK CALL: Gunns (GNS.AU) target price lowered to A$0.63 from A$0.79 by JPMorgan and to A$0.60 from A$0.84 by Deutsche Bank after cutting earnings forecasts on back of late Friday’s trading update and restructure plans, but differ on merits of restructure. With weaker than expected Japanese export woodchip earnings, JPMorgan says AUD strength has impacted more severely than expected, cutting FY10 EBIT by 45% but noting “the need for GNS to complete its proposed restructure as soon as possible appears increasingly acute.” However Deutsche Bank cuts FY10 earnings forecasts by 63% and says “we remain of the view that the company should not pursue a demerger nor the pulp mill project, as they are not likely to add to value,” retaining Hold rating. GNS last 52.5 cents.(.(JavaScript must be enabled to view this email address))

HERE: Earlier on Tasmanian Times: John Lawrence: Accounting for Dummies—Lessons from the Forest Industry