Monday, 12 January 2009

Great Southern heads further South

Great Southern (GSL)continues its search for cash to enable it to survive 2009 after a tumultuous decline in its fortunes during 2008.The Plan to purchase 6 tree projects and 2 cattle projects from investors in exchange for GSL shares was aborted in Dec 2008 when the value of GSL shares fell as low as 12.5 cents. GSL will try again to get approval from investors and shareholders in the last week of Jan 2009. The shares are currently trading at 17.5 cents, not much improvement.

This time the Independent Directors had no alternative but to recommend against the Plan in respect of the 1998 Project which is currently being harvested. 1998 investors can wait a few months to receive $2,300 cash or accept GSL’s offer of 4,606 GSL shares currently worth $800. No need for a calculator.

GSL has looked to other avenues for cash and has reportedly sold 26,000 hectares of land in Queensland for $23m. There are 10,900 hectares of investor’s trees growing on this land. Information lodged with ASX reveals that 6,248 hectares were planted in Queensland as part of the 2001, 2002 and 2003 Projects and that the average expected yield at 10 years is only 107 m3 per hectare (250 m3 was the expectation).At current prices the return per woodlot is only $1,148 (the original outlay was $3,300).GSL have conceded the land is unsuited to growing pulpwood trees.

Also up for sale, by auction this month, are 2 beef properties in Circular Head comprising almost 1,600 hectares. It is expected that GSL will gain at least partial acceptance from cattle investors to repurchase their interest in cattle in exchange for GSL shares, which will then allow GSL to sell some cattle and some cattle properties. These are the GSL’s most liquid assets. Much of the forestry land will be difficult to sell because it’s leased to woodlot investors who will only pay a miserly amount of rent (because of the miserly yields) at harvest time.

When GSL originally announced their intention to purchase investors’ interests in the 6 tree projects only 9 months figures for the latest financial year were available. The full 12 months figures have now been released. The result is a shocker, a $64m loss. This is after finance costs of $73m, write off of doubtful loans to disgruntled MIS investors of $57m and write off of impaired (vanished?) goodwill of $30m. Worse still was the deterioration in the cash position by $116m over the full year.

Even more interesting in the full year’s accounts is the change in accounting policy with respect to future project management fees. As a rule revenue is included as income when it is earned not when it is received. But only when it can be reliably measured. In the past, project fees were not recognised as income until the value of the project’s net harvest proceeds were calculated.

However the 2008 full year’s accounts contain a change. GSL has now determined that reliable measurement of the net proceeds from the harvest of plantation projects can be made after approximately 4 years of timber growth. GSL has included $17.4m as management fees, $1.4m to be received in the next year and $16m thereafter. Some of the revenue won’t be received for 6 years. But it’s been booked in this year’s accounts. It helped boost the bottom line (or partially offset the loss). A bold move. Shades of Eddie Groves from ABC Learning , now a legend when it comes to revenue recognition. Eddie could recognise revenue at 150 paces. Eddie bought some day care centres in September 2007 for $72m. When accounts were prepared, he reckoned he should have paid $123m so he booked the $51m difference as revenue, a discount on acquisition. A few days later his bank margin called him. Financial oblivion soon beckoned.

To put it in perspective, GSL has been managing tree plantations since 1994. GSL is now admitting that from 1998 onwards it has had reliable information about plantation yields. Yet it continued to say that 250m3 per hectare was a reasonable yield after 10 years. For GSL to make such an admission now is quite staggering, seeing as lawyers acting for aggrieved investors have already suggested misleading and deceptive conduct by GSL and failure to make adequate disclosures at material and relevant times.

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