high risk but potentially big returns

Recently purchased GNS at 20c. No harm following someone with a track record such as Chandler's.

looking for a retest of 25c then consolidation and then a push to 40c within next 3 months.

Fat Prophets report below...



Billionaire backing for Bell Bay

Deep value investing relies on the premise that it is possible to buy a stock which is trading at a substantial discount to ‘intrinsic value’. This discount can be due to any number of reasons, but common amongst these are market distrust of the management and/or company, bad publicity, lack of analyst coverage, or a prevailing misconception of value drivers. Having identified these situations the value investor will then look for potential catalysts which may close the discount.

We have focussed much of our energy over the years on identifying such situations and we believe forestry company, Gunns (ASX, GNS) bears all the hallmarks of a classic deep value play.

“We believe the deal with Richard Chandler is a seminal moment for the company”

The Tasmanian based company has certainly followed the script in recent years and given every cause to be discounted.

Investors have lost faith and many analysts have stopped covering Gunns following a number of operational setbacks in recent years. The GFC also meant that the company had to mothball plans for its Bell Bay pulp mill in Tasmania after banks refused to fund it. Only in December, the company slashed EBIT forecasts for 2012 by up to $20 million, only 3 months after pegging earnings of $40-$50 million.

Previous management have also not been held in the highest regard. John Gay, the former Chairman is on trial for insider trading in relation to a sale of shares prior to the company’s profit warning.

However, amongst all the gloom the company appears to be on the way back. A rationalisation programme is well underway with a view to releasing non-core assets and rebuilding the company’s balance sheet. And turnaround plans were given a further shot in the arm last week, ironically enough by a high profile deep value investor.

New Zealand born billionaire Richard Chandler is set to pump $150 million in the forest products group through a share placement and bond issue. The deal is part of a wider plan to raise up to $280 million in new capital.

As part of the deal Gunns is looking to get away a $130 million pro-rata renounceable rights issue offering at a ratio of 1.3 new shares for every existing share owned, and a price of 12 cents.

The agreement announced on the 8th February 2012 will see the turnaround specialist’s investment vehicle, Richard Chandler Capital Corp (RCCC), secure a cornerstone equity stake in Gunns of at least 39 percent. Half of the investment from RCCC will be in the form of a $75 million bond with attaching convertible warrants and the rest in shares at the same price as the rights issue.

Mr Chandler has made the logic for the investment abundantly clear – he sees the core focus being to develop the stalled $2.3 billion Bell Bay pulp mill. And we agree that getting the project back underway will unlock substantial shareholder value longer term.

And Mr Chandler has demonstrated a prodigious record at identifying turnaround situations. New Zealand’s richest man has made his fortune (circa $4 billion) through deep value investing, often in distressed situations getting it right more often than not. His highest profile call being a 19 percent stake in Chinese forestry company Sino-Forest.

So what is the reclusive value investor backing this time?

Established in 1875, Gunns is Australia's ‘largest integrated hardwood and softwood forest products company’. The company comprises 4 main business units.

The forest products division manages forest plantations in Tasmania and mainland Australia, and markets associated products for export.

Gunns Plantations Limited was set up in 1999 and operates registered Managed Investment Schemes on behalf of investors in plantation woodlots, walnut orchards and vineyards. In 2010 it took on the Great Southern Plantations forestry schemes, adding more than 120,000 hectares.

The company’s timber products division is one of the largest producers in the timber sector with 10 sawmills across Australia. Gunns is one of the largest suppliers of hardwood woodchip to Asian pulp mills, with Japanese mills accounting for over 65% of all woodchip exports.

The Bell Bay pulp mill is potentially a jewel in the crown. The plantation based mill in northern Tasmania is optimally located beside Gunns’ existing wood fibre operations. In addition to local efficiencies the company is also well positioned geographically to supply Asia, a heavy pulp consumer, and has an advantage here over peers, the majority of which are based in South America.

Gunns has however gone through somewhat of a reorganisation over the past year, borne out of necessity and a creaking balance sheet.

The company has been selling non-core assets and consolidating timber processing units. Currently on the block are the company’s Heyfield native forest sawmill in Victoria, an $85 million Managed Investment Scheme loan book, and a woodchip ship, Orana. Gunns’ $120 million sale of Green Triangle forest estate assets is meanwhile currently awaiting FIRB approval.

The company’s core focus will be the softwood sawmilling business and leveraging extensive Tasmanian hardwood plantations through the Bell Bay pulp mill.

The Tasmanian mill certainly seems to be the epicentre of the reorganisation, and indeed a key attraction for Mr Chandler. The mill has effectively been mothballed for 7 years due to lack of funding. Although RCCC are eager to point out they see Gunns as a ‘worldwide plantation forestry company’.

The $2.3 billion project is a sizeable one. However, we believe that the deal with Mr Chandler will allay many of the fears of potential backers and will go a long way to securing joint venture partners.

The company’s balance sheet is also set to improve dramatically as a result of the capital injection and continuation of Gunns’ asset sale programme.

Gunns currently has circa $360 million in debt and the capital raising will see most of this paid down by year end.

In the meantime the company has negotiated to extend its $340 million extended debt facility through until the end of the year.

It must be pointed out that there are political risks associated with the Bell Bay project, but we believe these will be resolved.

The prospect of mill development continuing has opened up something of a political furore. The Greens Leader, Nick McKim, has warned of a backlash by environment protestors. However, proponents point towards the substantial benefits to the local economy. The pulp mill project would create 3,000 jobs and up to $1 billion in federal and state taxes.

We believe that the importance to the Tasmanian forestry industry will ultimately trump environmental concerns.

We believe the deal with Richard Chandler is a seminal moment for the company. It should be noted that the agreement is conditional on approval from the Federal Government's Foreign Investment Review Board and shareholders. The potential economic benefits to the local economy and shareholders will see the agreement rubber stamped, in our view.

The deal is set to go before an extraordinary general meeting mid-April, with deal completion aimed for May.

With respect to the charts, the tie up with RCCC has clearly lit a fire under Gunn’s share price. And in the short term price action as indicated by RSI, is looking quite full.

With reference to the weekly chart, resistance is indicated at the 39 week moving average. After respecting the 2011 lows of 9.5 cents, prices are forming an important base, which is bullish. There is a potential of a reversal of the longer term downtrend. This gives us some confidence that once the current resistance level of 25 cents is breached to the upside, new highs are likely to follow into the broader term.

We expect that shareholders and the FIRB will be supportive of Gunn’s tie up with Mr Chandler. Whilst dilutive to shareholders initially, the subsequent long term impact will be highly positive in our view. The capital injection will dramatically improve balance sheet health and pave the way for the development of one of the company’s primary assets, thereby unlocking significant shareholder value in the years ahead.

Accordingly we recommend Gunns as a high risk buy to all Members.