Investment Report: Gunns Limited (GNS) - Assignment Example

? Investment Report: Gunns Limited (GNS) Introduction Gunns Limited is a major forestry firm. The company is located in Tasmania, Australia and was founded in 1875 by two brothers – John and Thomas Gunn. Being founded in the 19th century makes it one of Australia’s most senior organizations. While starting from humble beginnings, the company gradually developed and today operates with over 900 square kilometers of forestry; although a variety of forestry is grown on this land the overwhelming majority are eucalyptus trees. This large portion of land functions to make Gunns Limited Tasmania’s largest private landholder. In terms of company size and corporate structure, the organization employees approximately 1200 employees and is the largest exporter of woodchip operations in the entire Southern Hemisphere. Recently, the organization has undergone a significant restructuring, focusing almost entirely on the construction of a $2.3 billion dollar Tamay Valley (Bell Bay Area) Pulp mill. This pulp mill will have significant affects on the investment viability of Gunns Limited. Within the context of this corporate structure, this report constitutes a comprehensive analysis on the viability of investing in Gunns Limited. Particular attention is given to the Bell Bay Area Pulp mill as this constitutes the main are of organizational concern for current and future revenue. Specific elements of consideration are political and regulatory factors, economic considerations, demographic and socio-cultural issues, technological factors, and CSR issues. These areas of consideration are followed by a conclusion and finally a recommendation regarding the company’s investment potential. Political and Regulatory Factors Relevant to investment concerns, the organization has faced a number of political and regulatory factors in terms of both its overarching operations and its specific business ventures. One of the most recent political and regulatory considerations is a recent settlement the company reached with the government for exiting native forest logging. In these regards, the settlement was with the State Government for $88 million and is recognized as significantly contributing to the debt range the company experienced in last year’s economic cycle. Currently the organization is seeking to undergo a partnership both with government agencies and an outside profit sharing entity. While it remains uncertain recent financial forecasters have noted that financial announcement foreshadow a soon to be announcement of a financing partner for the organization’s recent expansion measures. In addition to political restructuring relevant from an investment perspective, Gunns Limited has established a side organization – Southern Star Corporation – as a means of further differentiating the organization for greater efficiency; ultimately Southern Star Corporation will constitute 49% equity in the upcoming Bell Bay Pulp mill, a percentage open to potential investors. In terms of the organization’s current major business venture, the Bay Area Pulp mill, there has emerged a considerable amount of regulatory objections from both political and environmental groups. One of the most prominent objections has been raised by the Wilderness Society who has conceivably objected to the construction of the mill based on the grounds that it will require significant destruction to Tasmanian forestry. Even while the organization is motivated by environmental concerns, their objections raise significant questions for potential Gunn’s investors as strong points have been raised regarding the project’s overall viability. The comprehensive objections of the Wilderness society have functioned through appealing directly to government agencies responsible for funding the pulp mill. The objections have constituted claims that in funding the pulp mill, the government will be contributing to inflation, as the enterprise will largely be unprofitable (Report questions pulp mill benefits, 2008). Ultimately, this battle between Green organizations and Gunns Limited regarding the project’s viability constitutes some of the most important investment considerations. Economic Considerations There are a number of economic considerations that are prominent elements related to Gunns Limited. One of the most prominent considerations related to the company’s current revenue situation. While Gunns Limited had long been a multi-million dollar profit organization. Even as the recession hit the company continued to remain largely profitable throughout 2008. Major changes occurred, however, in the 2011 economic cycle. Indeed, for Gunns Limited, the 2011 economic cycle incurred over $355 million in loses; this substantial loss is noted to be the largest profit decline in Tasmanian corporate history (Clark 2011). When one considers that in 2009-2010 the company recorded a $28 million profit, the $355 million dollars in loses is a colossal corporate loss. The economic loss has been attributed to a number of potential areas of concern. In these regards, one of the most overarching concerns has been the recent economic recession. In addition to affecting the company’s export profits directly, it has also negatively affected Gunns Limited’s business development ventures. There are a number of important economic considerations related to Gunns Limited’s business ventures. There are a number of questions related to the company’s significant revenue loss in the last year and whether the organization will continue with the proposed $2.3 billion dollar Tamar Valley pulp mill. In this context of understanding it’s been noted that the organization plans on continuing with development of this mill (Clark 2011). Still, the organization’s significant debt has been directly linked to its pulp mill venture. As a means of raising capital for this venture the organization has had to sell many of its primary assets and write down the value of many of the other assets that they are retaining. In these regards, the organization has undergone a write-down of its Victorian plantation assets, which totally near $476 million. There are a number of economic concerns related to the Tamar Valley Pulp mill. In terms of construction aspects, there are a number of prominent development concerns that must be factored in when individuals are considering the organization’s overriding investment potential. If completed to full capacity, the pulp mill has substantial investment potential for the organization as it could potentially create up to 1600 temporary jobs during the construction phase and up to 3100 long-term jobs after its completion; furthermore nearly $6.7 billion in spending will be generated in the upcoming 25 years. These figures constitute some of the most significant economic production in the Tasmanian region during recession economics and if projections are met could potentially constitute significant revenue production. Even with the optimistic recession era projections for the upcoming pulp mill, one considers that there are considerable questions that Gunns Limited will be able to meet these potential figures. One prominent objection has been raised by Naomi Edwards, Economics Advisor to Australian Greens Leader Bob Brown. From a broad ranging perspective Edwards contended that many of the economic figures presented by Gunns Limited are unviable. Edwards (2006, pg. 1) specifically argues, “the very real possibility that this pulp mill will not be able to compete internationally.” Within this context of understanding, specific contentions include that the Bay Area Pulp Mill has a prohibitively high cost per installed tonne to build the pulp mill. Another concern is the mill’s market position relative to future international markets; specifically, Edwards argues that future competition from Chilean, Brazilian, and Indonesian markets will significantly outpace any short-term gains that will be made after the pulp mill’s construction. There is also a noted increasing oversupply of BHKP relative to demand. One notes that this may not be as strong a concern as possible, as Asian markets have shown progressive increases in demand. Still, there continues to exist tremendous volatility in world pulp prices, especially marked in the current economic climate. Edwards also contends that there is, “linkage of economic returns on state native forests to these prices, through the supply contract” (Edwards 2006, p. 1). Ultimately, economic objections to the Bay Area Pulp mill contend that it will falter under international competition and will result in a high possibility of government bail-out subsidies, negative stumpage and other projections to ensure that the pulp mill remains active. Even as these objections constitute a significant indictment of the billion dollar project, executives with Gunns Limited have argued that the objections are off-based and biased, as they are not independent, but were written by a paid Greens advisor for Senator Milne. Still, it’s clear that other reports have also questioned the financial viability of the Bay Area Pulp mill. For instance, the Wilderness Society commissioned a study by the National Institute of Economic and Industry Research. While Gunns Limited had claimed that the mill would inject $3 billion into the local economy the report argued that “the possibility of a substantial positive is less than 50 per cent” (Report questions pulp mill benefits 2008). In these regards, substantial questions have been raised regarding the overriding economic viability of the Bay Area Pulp mill. Demographic and Socio-Cultural Issues In terms of demographic and socio-cultural issues they are a few, but highly important considerations regarding Gunns Limited for potential investors. In terms of the specific organization and its product revenue in current and future markets, there exists considerable volatility. For instance, in the recent economic cycle the organization experienced significant revenue decline – 12 percent – which was greatly attributed to the price downturn in woodchips. These socio-cultural concerns are compounded by the increasing threats from international forestry firms that are able to compete in a less stringent regulatory environment. While the organization is indicated to potentially contribute to demographic concerns through strong raises in employment – up to 3,000 added jobs upon recent project completion – there continues to be cultural objections from environmental groups. These concerns constitute significant questions regarding the future viability and investment potential of the organization. Other prominent socio-cultural issues include Gunns Limited’s history of public criticism, including questionable decision-making by leadership. In these regards, the chairman of Gunns, Edmund Rouse, attempted to bride a Labor political official to cross the floor as a means of allowing the Liberal Party to resume power; this move would have cleared regulations for Gunns Limited to resume logging measures. Another questionable ethical move occurred when the Premier of Tasmania received substantial home renovations from a Gunns Limited Company, specifically when Gunns was seeking his approval for the Bell Bay Pulp Mill (Lyons 2007). Technological Factors One of the prominent technological ventures that the company has undergone is the Tamar Valley pulp mill. This mill is a $2.3 billion dollar business venture that has been designed to greatly expand Gunns Limited’s infrastructure and outreach. This mill is scheduled to be built in the Tamar Valley, near Launceston, Tasmania. In terms of structural components, the mill implements contemporary technological factors in using the Kraft process, with Elemental Chlorine Free bleaching. This bleaching process is noted as one of the most relevant technological factors within the organization as it has garnered attention from both groups supportive of its efficiency and public interests groups that have been wary and objected to its potential for environmental degradation. The main argument is that Gunns Limited has implemented elemental chlorine at an intermediate stage, instead of hydrogen peroxide or methanol (The Tasmanian Pulp Mill 2008). Gunns Limited has contended that their bleaching process is both effective and environmentally responsible and has merely received unwarranted negative criticism (The Tasmanian Pulp Mill 2008). Like much of the organizations’ outside operations, it will implement 100 per cent eucalyptus forestry stock. In terms of future technological shifts in a market context, the company is currently transitioning forest operations to a plantation only base (GUNNS LIMITED (GNS) 2011). CSR Issues When examining the investment potential of Gunns Limited from a corporate social responsibility perspective, it’s evident that the organization has exemplified a great number of outreach measures. While the company has issued a number of broad ranging environment and sustainability perspectives, from an investment perspective it’s more important to consider the organization’s actual sustainability to measures. Some of the recent CSR measures that have been implemented are a comprehensive reservation framework for biological diversity. This forest management estate is resulting in over 45,000 hectares of reservation within our freehold land estate. In addition, they have promoted the conservation of indigenous and historic cultural heritage sites across their land estates. Even as these existing measures constitute significant approaches to sustainability one considers that in-large part they simply follow Australian environmental and development regulations. Still, the most pervasive investment concern is that despite the recent $88 million dollar settlement the organization has otherwise had a viable track record of keeping up with environment regulations. In terms of proposed new measures for corporate social responsibility the organization is developing a sustained and focused growth in their managed plantation estate. The size of this estate has grown from under 100,000 hectares in 2003 to over 300,000 hectares today. In terms of corporate social responsibility that extends beyond the governmental regulations and environmental restrictions the development of this managed plantation estate has a number of strategic and investment viability. In these regards, the development constitutes a progressive move away from public natural forest resources to one internal to the organization. In these regards, the organization’s newly planned Bell Bay Pulp Mill will be based entirely on sustainable forestry resources internal to the organization. When considering much of these developments in terms of investment potential one notes that in large part the organization has not only demonstrated significant adherence to government environmental regulations, but has also developed sustainable resources as a progressive means of corporate revenue development. Even as the organization is working to develop environmental and sustainability measures for its recent operations, a considerable amount of strife has emerged from environmental organizations regarding the potential of environmental degradation regarding the proposed Bell Bay Pulp Mill. In addition to earlier specified economic objections ranging for the potential failure of the mill causing inflation to the general international unprofitability of the venture, groups such as the Wilderness Society and TAP into a better Tasmania have raised a number of CSR questions. In these regards, numerous rallies and protests have emerged that have objected to the pulp mill. Grounds for objection have ranged from the degradation of forestry to potential influxes of pulp smell from the region into Tasmania’s surrounding high tourist area. Since the announcement of the mill in 2004, numerous lawsuits have been raised against Gunns Limited based on the notion that the organization used unethical processes in circumventing regulations (Milovanovic 2011). There have even been websites entirely devoted to protesting the construction of the pulp mill (McGunns Lawsuit by Gunns Limited 2011). While these lawsuits have had varying degrees of success, with Gunns Limited winning a number of court settlements, from an investment perspective it’s clear that the considerable environmental outcry has had a detrimental impact on the organization. Consider that when the project was announced in 2004 Gunns Limited was trading at $4.50 to a current day $0.265 (Price Results. 2011). Ultimately, it’s clear that the substantial environmental objections raised against Gunns Limited have had a strong impact on the corporation’s investment viability. Conclusion In conclusion, this investigative report has examined the investment potential of major forestry enterprise Gunns Limited. Within this context of understanding specific elements of consideration are political and regulatory factors, economic considerations, demographic and socio-cultural issues, technological factors, and CSR issues. In terms of political and regulatory investment considerations it’s considered that there are recent settlement arrangements that have occurred between the organization and the state government over exiting native forest logging for $88 million. Other prominent considerations relate to political alliances that the company has attempted to undergo through its massive restructuring campaign; most notably the organization is seeking a profit sharing partner for its Bell Bay Area Pulp mill. Still a number of regulatory concerns have emerged through environmental groups concerned with the organization’s expansion in Tasmania. In terms of economic elements, a number of investment considerations have emerged in terms of the company’s recent revenue losses. In these regards, it’s noted that in the recent economic cycle the company suffered a staggering $355 million dollar loss. Still, this has been primarily attributed to restructuring of the organization for the upcoming Bell Bay Area Pulp mill. In terms of demographic and socio-cultural issues, one notes that prominent demographic concerns attest to the strong amount of job creation the organization could contribute to in its recent expansion venture. Still, there are substantial socio-cultural objections to the organization’s ethical and environmental approach. In terms of technology, the main consideration was the environmental sustainability of the organization’s bleaching technique. Finally, in investigating CSR issues from an investment potential, it’s revealed that the organization has faced tremendous challenges based on its sustainability in the upcoming Bell Bay Pulp mill venture. Recommendation When considering the investment potential in Gunns Limited there are a number of considerations, with the ultimate decision being neutral. Historically Gunns Limited has been a strong investment option, existing and progressing since the late 19th century. Still, it’s recognized that the current world climate and contemporary economic recession constitute a strong shift from previous challenges. When establishing the neutral investment stance there are a number of specific aspects that must be articulated. It’s clear that the central question in the organization’s future investment viability is the success of the planned Bell Bay Pulp Mill. The organization has entirely restructured current holdings, organizational structure, and undergone a $2.3 billion dollar investment in the project. While there are a number of indicators that the tar mill project could potentially gain success, there are an equal number of questions that have been raised against the long-term financial viability of the project. Even as the National Institute of Economic and Industry Research report was commissioned by the Wilderness society, one cannot ignore the notion that the mill has less than a 50 per cent chance of financial success. Significant questions have been raised about the strength of the product to compete internationally as well. These elements, coupled with environmental concerns surrounding the mill’s sustainability and the company’s bleaching process, make investment in Gunns Limited a high-risk venture. While the current low-cost of shares relative to past trading prices and the potential of the pulp mill to find substantial success create some potential for future growth, there are clearly too many questionable investment factors. It is for these reasons the decision for investment is neutral. References Clark, N. (2011). Gunns' $355m loss blow. Available: http://www.themercury.com.au/article/2011/08/26/256251_tasmania- news.html. Last accessed 21 Oct. GUNNS LIMITED (GNS) -- Company Profile. (2011). Available: http://www.investsmart.com.au/shares/asx/Gunns-GNS.asp. Edwards, Naomi. (2006). ‘Too much risk for the reward – an analysis of the pulp mill returns to the people of Tasmania.’ Resource Planning and Development Commission. Lyons, J. (2007). Gunned down. Available: http://www.theaustralian.com.au/news/features/gunned-down/story- e6frg6z6-1111114570595. McGunns Lawsuit by Gunns Limited. (2011). Available: http://www.mcgunns.com/. Milovanovic, S. (2011). Legal win for Gunns in fight for Tassie mill . Available: http://www.theage.com.au/national/legal-win-for-gunns-in-fight-for-tassie- mill-20090409-a24z.html. Price Results. (2011). Available: http://www.asx.com.au/asx/markets/priceLookup.do?by=asxCodes&asxCo des=Gns. Report questions pulp mill benefits. (2008). Available: http://www.abc.net.au/news/2008-01-29/report-questions-pulp-mill- benefits/1026142. The Tasmanian Pulp Mill – Bell Bay Industrial Estate. (2008) http://tasmaniapulpmill.info/yahoo_site_admin/assets/docs/Raverty_resign ation.131154933.pdf Read More