Thursday, 21 April 2011

Gunns, FT and cash flow problems

Questions about Gunns'  and Forestry Tasmania's cash flow problems abound Charles(#9)asks

1. Forestry Tasmania FT has an increasing overdue credit portfolio, which has risen steadily over the years to $40 million?

Comment: This is essentially correct. FT’s trade receivables at 30th June 2010 were $38.5 million, after writing off $1.2 million worth of bad debts for the year. $6 million were GMO JV receivables, the balance related to its own receivables.

2. Gunns is apparently 80% of FT’s business, therefore the assumption would be that Gunns owes FT $32 million. Therefore if the above assumptions are correct it must be fair to say, that Gunns are using, under a sweet- heart deal, FT as an extension of their overdraft, ie taxpayer funds to prop up a cash flow problem?

Comment: The Auditor General in his last report on FT said Gunns comprised 52% of FT’s forest sales. I’ve heard the figure is higher this year. It is reasonable to apply this % to FT’s receivables excluding the JV receivables to get a rough idea as to Gunns’ share. As to the second part of the question, many large businesses have much more stringent terms for receivables than they apply to their payables. That allows them more working capital. They all do it, if they can. If you happened to catch a look at Naomi Edwards’ recent paper, fleetingly posted on TT, she referred to Gunns’ monopsonistic power in the market. (A monopsony is a single buyer)

3. If all the above all remains correct and if FT was a private company then I’d suggest they would have ceased trading between each other. And the supplier would have instigated liquidation proceedings.

Comment: Gunns’ monopsonistic power means that it can dictate terms. Ipso facto, there aren’t other buyers, in the short term at least, able to match Gunns’ terms with regard to the products being sold. In such circumstances pushing Gunns over the edge would cause even more problems for FT. The devil you know!

4. If all the above assumptions and statements are still correct, then Gunns must have some serious cash flow problems (or FT should hire a harder collection manager) given that Gunns is a receiver of FT product and receives all their money prior to any ship leaving port.

Comment: Gunns certainly does have cash flow problems. Its operating cash flow is likely to be negative; this is partly due to Gunns’ trade receivables blowing out a bit, not the woodchips perhaps, but its sawn products. Gunns’ situation is further complicated by the fact that it also has a lot of loan receivables, debts still owed by MIS investors.

5. Gunns however may well be a poor manager and it has chosen to purchase products from FT (the taxpayer) and then stockpiled the products without having a future purchaser in mind. This should not be the problem of the taxpayer, given that Gunns owns the products, but has not yet sold them.

Comment: There’s lots of evidence that Gunns is a poor manager but no evidence that it is stockpiling product. Gunns is trying to sell everything it can, collect the cash as soon as possible whilst taking as long as possible to pay suppliers like FT. It’s all about working capital.


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