looking forward, page-15

Hi jonesw - currently there are plenty of companies in a financial squeeze and TIM is one of them. I think, two questions should be asked before investing:
1. Does TIM have the capacity to meet its debt obligations? (Assets: land and water)
2. What is TIM's prospect to generate a decent profit into the future? (established position in agribusiness)

Here is 4-month old Mayne report:

Answering the debt question

Timbercorp's listed debt instruments are yielding more than 20% which suggests the market believes there is considerable risk involved. Fred Woollard and others honed in on the $280 million in current debts out of a total of more than $860 million, suggesting a gearing ratio of 60% was on the high-side in a credit-constrained world.

Sol Rabinowicz said more than $100 million had already been rolled over this year and much of the rest was lease liabilities and margin loans that will always be classified as current. There was no detail given on who banks the company, but we were told about a number of smaller facilities which gave greater flexibility and funding diversity.

My final debt question pointed out that the problem with Centro, Allco and MFS was something called cross-collatoralisation where a vehicle looks separate but liabilies can spread to the parent company in certain circumstances, such as a default. When this happens, you then get a run on the fund and once you freeze redemptions your reputation is shot.

The reassurances from chairman Hayes, auditor Sandy Pelusi and Rabinowicz were emphatic. There is one $20 million loan facility that is guaranteed and on the balance sheet, but the rest are completely at arms length.

The future of Timbercorp

I walked out the meeting thinking that Timbercorp was a speculative buy after plummeting from $4 to $1 in just 18 months, giving it a market value of $350 million against claimed net assets of $520 million. It is facing regulatory risks but the company has built up huge land holdings and water rights over a staggering 100,000 mega litres.

It is well placed to ride the soft commodity boom and we were regaled with those familiar statistics about the world needing to feed an additional 87 million new mouths a year. Competing with Chinese garlic and Spanish olives is also important for our current account performance.

That said, the company does appear to have overpaid for some of its land-holdings. Investors who bought into the early eucalyptus schemes 10 years ago are only now getting their final payouts and the annual returns have been between 2-4% on a pre-tax basis.

Rabinowicz predicted they would get better over time and possibly even reach double digit figures - but this is hardly spectacular. Whilst the ATO and Rudd Labor could well kill off the MIS model, Timbercorp has a powerful argument in pointing to the huge investment it has made in regional communities.

Many farmers haven't enjoyed the tax-driven corporatisation of farming, even though a number have cashed out their land holdings to Timbercorp. The company has strategically built a huge amount of water entitlements but these are difficult to sell on a stand alone basis, although there was talk today of spinning out a separate water fund. Many dairy farmers now find their water rights are more valuable than their properties but it usually makes sense to sell them together.

The company was fortunate that it managed to raise more than $60 million in a placement and SPP two months ago because it has been tanking in recent weeks.

Based on what I heard today, the company has been unfairly tarred by the demise of other complex investment managers such as Centro and MFS. However, it could simplify its structure and improve governance to try and win back market confidence. New Agriculture minister Tony Burke would probably be impressed by such a move as he drives a review of the MIS industry

As Fred Woollard said today, why leave your debt securities trading on a yield of 20% and lend almost $400 million to growers at about 9%. Then again, that's the business model and Timbercorp enjoys a margin clipping the ticket on the way through, as does its army of advisers. Indeed, Timbercorp's annuity income is predicted to rise from $240 million to $300 million this year which seems rather high given the low returns tax-driven investors have enjoyed so far.

All up, it was a very good meeting. My five questions are packaged up here and I'd rate the exchanges amongst the best 10 of the 300-plus AGMs I've attended over the past decade.

Do ya best, Stephen Mayne