Tuesday, 2 June 2009

Wither FEA?

Gunns have been trying to point out ( Gunns after the deluge ) how they differ from the recently fallen Timbercorp and Great Southern.

What about Forest Enterprises Australia Ltd (FEA)? Any similarities?

A common thread in all the MIS companies is that ANZ in the banker for all four. Little wonder they’re nervous. With such exposure it’s little wonder they were so ruthless with Great Southern. They didn’t allow them an inch. Forced them into voluntary administration and then 2 days later appointed their own Receiver to take charge.

FEA was the Leader of the Pack 10 years ago when Northern Tasmanian was invaded by MIS companies acquiring farming properties.

For about the last 6 or 7 years they’ve withdrawn from the front line and tried to develop a more stable business.

A recent podcast available via the ASX site dated 27th May 2009 has attempted to downplay the importance of MISs to FEA’s business. The approach was to look at composition of gross revenue.

Revenue from MIS activities in 2007/08 was $106 million (51%), timber revenue was $39 million (18%), and woodchips revenue from a 50% joint venture $23 million or 12%. The revaluations of land and standing timber assets contributed 17% of gross revenue. (this latter is included as revenue for accounting purposes, although only a book entry).

In 2007/08 MIS activities contributed $70 million to the bottom line, sawn products $3 million and woodchips just under $2 million. After deducting items like interest, the profit before tax was $67 million.

The bottom line was almost exclusively produced by MIS activities.

In the first 6 months of 2008/09, MIS contributed $7 million to the bottom line, woodchips about $200,000 and sawn timber a loss of $2.7 million. After interest expenses and unallocated overheads the loss was $6 million.

The key to FEA’s short term future is new MIS sales.

Whilst the cash for MIS sales comes in before 30th June, most is not booked as revenue until the following year. A total of $57 million received before 30th June 2008 will be included as MIS revenue in 2008/09 when plantations are established. Other MIS revenue comes from ongoing MIS fees. MIS revenue of $37million for the first 6 months produced MIS profits of $7million (referred to above).

Hence the accounts for 2008/09 will still show adequate MIS revenue, as most had been collected prior to 30th June 2008.

But the most crucial question is to what extent new MIS sales in the second half of 2008/09 will fill up the cash tin which is starting to look a little empty.

The business produced $66 million cash from operations in 2007/08. But the first 6 months of this year the cash from operations was minus $5 million compared to plus $6 million for the corresponding period in the previous year (although $7 million of this turnaround can be explained by the 2008 tax bill that needed to be paid).

In the accounts for the last 6 months ending 31st December 2008, the current assets available to discharge the current liabilities were starting to look a little lean and the Directors decided to sell $59 million worth of land to assist. If MIS sales fail to live up to expectations then the land proceeds will certainly be needed.

A recent report in The Australian suggested FEA may be struggling to sell the land. http://www.theaustralian.news.com.au/business/story/0,28124,25523596-36418,00.html.

The queue for new MISs is much shorter than previous years although the yield from the 1993 crop harvested in 2007/08 was over 400 tonnes per hectare over a 14 year rotation, better than predicted and far better than companies like Great Southern. But the area was tiny.

The after tax return to an investor was still only 7% pa. Not particularly flash given the extra risks.

FEA’s Directors have recently described their gearing level of 40% as conservative. Few who have just witnessed the speedy departure of Great Southern and Timbercorp would have used the same adjective.

At 31st December 2008 net debt was $197 million (bank debt of $207 million less cash of $10 million).

FEA aims to become a vertically integrated forest company. Currently most of the product used at the Bell Bay sawmill is purchased as part of the 290,000 pa tonnes of softwood previously supplied to Auspine.

FEA doesn’t own or control much softwood resource as part of their MIS business and FEA’s hardwood plantations are yet to be integrated into the sawmilling operation.

The integration process has a way to go.

In order for FEA to survive MIS sales will be needed. For a few more years at least.

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