Gunns chief argues losses due to period of transition

Embattled timber company slumps to loss of $355.5 million following heavy write-downs.

By InvestSMART · 26 Aug 2011

By InvestSMART ·
26 Aug 2011

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Embattled timber company slumps to loss of $355.5 million following heavy write-downs.

EMBATTLED timber company Gunns Limited has slumped to a loss of $355.5 million following heavy write-downs.

The annual net loss after tax compares to a 2010 net profit of $28.5 million and reflects a business in transition, managing director Greg L'Estrange said last night. In a review of asset values, Gunns found impairments including $218.1 million against Auspine assets, a 19 per cent reduction in the value of the Tasmanian forest assets to $406 million, and $77 million in provisions against MIS-related assets.

A strategic restructure has seen Gunns exit native forests and sell off a series of assets in a shift to a plantation-based business, eventually feeding the planned $2.3 billion Tamar pulp mill.

Gunns met guidance of underlying earnings before interest and tax at $41.6 million. In a presentation to analysts, the company claimed net equity of $1.5 billion, down 27 per cent on the previous year.

However, it remains in a trading halt, now three weeks old, originally called with its shares at 20.5?, as it negotiated a settlement with the Tasmanian government for exiting contracts from public native forests. The company also faces a deadline for ''substantial commencement'' of the pulp mill, required by August 30, or state environmental permits will lapse.

The analysts were told Gunns had undertaken substantial investment of more than $200 million, and works on the project to meet this requirement, but Tasmanian Premier Lara Giddings said the meaning of substantial commencement might need to be tested by the courts.

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Frequently Asked Questions about this Article…

Why did Gunns report a $355.5 million loss?

Gunns reported a $355.5 million net loss mainly due to heavy write-downs and asset impairments identified in an annual review of asset values, which reversed the prior year's $28.5 million net profit.

What specific write-downs and impairments contributed to Gunns' losses?

The company recorded major impairments including $218.1 million against Auspine assets, a 19% reduction in the value of Tasmanian forest assets to $406 million, and $77 million in provisions against MIS-related assets.

Has Gunns met its earnings guidance despite the loss?

Yes. Gunns met its guidance for underlying earnings before interest and tax (underlying EBITDA) of $41.6 million, even though the company reported a large statutory net loss after write-downs.

How have Gunns' overall asset values and shareholder equity changed?

In a presentation to analysts Gunns said net equity was $1.5 billion, which is down 27% from the previous year, reflecting the impact of the impairments and asset value reductions.

What strategic changes is Gunns making to its business model?

Gunns is undergoing a strategic restructure: it has exited native forests and is selling assets to shift to a plantation-based business intended to supply the planned $2.3 billion Tamar pulp mill.

Why is Gunns in a trading halt and what issues are being negotiated?

Gunns has been in a trading halt for about three weeks while it negotiates a settlement with the Tasmanian government over exiting contracts for public native forests, and to address other developments related to the business transition.

What is the deadline and risk around the Tamar pulp mill 'substantial commencement' requirement?

Gunns faces an August 30 deadline to demonstrate 'substantial commencement' of the Tamar pulp mill, or state environmental permits may lapse; the company says it invested more than $200 million and undertaken works to meet this requirement, while the Tasmanian Premier cautioned the meaning of 'substantial commencement' might need court clarification.

What should everyday investors take away from Gunns' recent update?

Investors should note that although Gunns met underlying EBITDA guidance, the company is in transition with large asset write-downs, a 27% drop in net equity, an ongoing trading halt while it negotiates with government, and a critical regulatory deadline for the Tamar pulp mill that could affect future plans.