Greg L’Estrange completed another semester last Friday with the release of Gunns’ latest set of consolidated financial statements for 2010/11.
Greg may be looking for a social license, but the statements highlight Greg’s progress as he staggers towards D Day, in January 2012, a date with debt and destiny when his bankers will decide whether to roll over or refinance a large part of Gunns’ debt. The dramatic decline in asset values and tight cash flows continues the pattern of 2010, a pattern that largely came to light with the abdication Greg’s predecessor.
The Directors “are confident that new banking arrangements on mutually agreeable terms and conditions will be established prior to the maturity date of the existing facilities.”
If Gunns hasn’t enough cash from operations or from additional lines of finance or from selling the assets currently for resale, then Gunns will reduce working capital, raise more equity and further reduce operating and non operating capital expenditures. Goodness me what a comprehensive plan. Are there any other options? Any bases not covered? At least the problems confronting Gunns are laid out for all to see.
In previous years the auditor has drawn attention to the “material uncertainty as to whether the carrying value of capitalised pulp mill expenditure can be recovered for the amount stated and as to whether additional obligations will be incurred in relation to committed project costs”. In other words should the costs be written off in the income statement? Gunns is not short of deductible write offs so it will desist for as long as the dream is alive.
The same statement about the material uncertainty of the pulp mill appears this year. In addition this year the auditor has chosen to draw attention to “the existence of a material uncertainty in respect of financing requirements which includes the planned sale of certain assets in the course of the next twelve months. The Group’s ability to operate as a going concern and therefore whether it will realise its assets and extinguish its liabilities at the amounts stated in the financial report is dependent on these matters”.
Whenever Directors and indeed auditors refer to going concern problems things are reasonably serious. There needs to be reasonable grounds to be able to affirm a company’s solvency that it can pay its debts as and when they fall due, not simply an affirmation that assets exceed liabilities.
That is the very problem. Most of Gunns’ $628 million debt is due to be repaid in this current financial year 2011/12. So the Directors need to be able to show this is possible. Assets are reclassified as ‘assets held for resale’. In 2009/10 the problem wasn’t as pressing as only $78 million of assets were so classified, but at the end of 2010/11 the assets available for resale totalled $953 million.
One perennial problem when trying to ascertain a company’s value is whether the balance sheet values are realistic. Accountants traditionally record assets on a historical cost basis. Some assets may remain on a balance sheet with values that bear no relationship to a possible realisable price. Other assets need to be updated each year to a fair value as mandated by accounting standards and such adjustments are reflected in the income statement either as revenue or as an expense. When assets are reclassified as held for resale they too need to be revalued to reflect a fair market value. The $953 million of assets now held for resale have already suffered a $425 million haircut. They’ve been written back by 30%. That not to say they will fetch $953 million. The market may disagree with Gunns’ values. One thing is reasonably certain, Gunns won’t get more.
It’s mainly the write down of asset values that has caused Gunns’ large loss for this year 2010/11. As stated above most write backs are reflected in the income statement, but esoteric accounting standards mean some write downs bypass the income statement and directly reduce a company’s equity.
Thanks JL on TT
GNS Price at posting:
13.5¢ Sentiment: Sell Disclosure: Held
