The sharemarket is nervous about the future of forestry company Gunns Ltd after it revealed a 98% fall in first half profit yesterday.
Weak demand from Asia, the strength of the Australian dollar and the spate of failures among managed investment schemes (such as Timbercorp) took their toll on the company.
Investors thumped the company, selling the shares down yesterday by more than 20%.
They closed at 68.5c, down 19.5c, or more than 22%.
That’s not as low as the 63c reached in the depths of the market slump last March, but its close.
As a reaction to the terrible result, the company revealed plans to restructure the company.
Gunns posted net profit for the six months to December 31 of just $400,000, down from $33.6 million in the previous corresponding period.
First half revenue was down 24% on the previous corresponding period to $325.9 million, the company told the exchange yesterday.
Gunns omitted interim dividend.
It paid a first dividend of 4c in 2008-09.
In justifying the restructure, Gunns said the first half result had been affected by a downturn in Asian markets, the rising Australian dollar and the collapse of several managed investment schemes.
"With the changing conditions in key markets and industry opportunities which have arisen, we have undertaken a comprehensive strategic review to reshape the company to realise value in the group’s assets and participate in growth opportunities," chairman John Gay said in the statement to the ASX.
The restructure will include the creation of a separate investment vehicle to facilitate direct investment in Gunns’ plantation forestry estate, which would value its assets more appropriately, Gunns said.
"This vehicle will also allow Gunns to maximise its investment in the Bell Bay Pulp Mill," the company said.
"We will also provide a more compelling investment structure to assist in closing the financing arrangements for the Bell Bay Mill.
"The mill is critical to maximising the value of our Australian forest resource, allowing Gunns to take a substantial proportion of this resource out of the relatively low-value and limited base of the commodity woodchip export market and add significant value to an export resource.
"These steps, which follow a comprehensive strategic review of the group, will substantially improve the company’s strategic position in forestry, fibre and timber processing for the future."
Gunns said the stronger Australian dollar impacted its competitiveness in Asian markets during the first half, and its major market in Japan was weakened by the global financial crisis.
"While the Chinese market is growing, pricing remains highly competitive due to the strength of the Australian dollar and short-term surpluses of low-priced competing products," Mr Gay said.
Wood fibre revenue in the first half dropped by 38% compared to the previous corresponding period, while timber products revenue eased 2%.
The relative value of the Australian dollar will be a critical factor in the competitiveness of supply into Asia in the second half, Gunns said.
"Market conditions for the wood fibre business are expected to remain weak although a gradual improvement is expected through the course of the 2010 calendar year," it said.
"Demand for timber products may increase as construction activity recovers, while earnings from the company’s role as manager of the Great Southern forestry projects will increase during 2010.
"The company expects significant earnings improvement and the reinstatement of a dividend payment in the second half," Gunns said.
The outcome of woodchip price negotiations for the 2010 calendar year and the impact on price and volume of supply will play an important role in the company’s full year performance, it said.
Further guidance will be issued once those negotiations are completed.
