something really really fishy, page-48

fyi -

Our Thoughts on the Recent Share Price Decline [GMG]
16-Dec-2008 13:22

Since raising equity at $0.90 on 28 Oct 2008, GMG's share price has been in decline and is now trading at ~$0.50. While post the raising GMG has not released any negative news to the market, we suggest possible factors contributing to its recent share price decline include:


GMG was being sold down as a funding source for other recently announced capital raisings in the REIT sector (including DXS, IOF and MOF) as well as other sectors such as Banks (eg. Westpac's ~$2.5bn raising);

Uncertainty over GMG's earnings outlook in FY09, FY10, and a lack of clarity over what is GMG's "stabilised" earnings base;

The impact of negative news flow/sentiment surrounding (a) IIF's pending capital restructuring, given that GMG owns ~10% of IIF and (b) the continued slide in the share price of J-REP since GMG and Macquarie Bank acquired their ~53% ownership stake in May 2005.

Concerns over asset valuations, the carrying value of intangible assets and the impact on gearing covenants; and

Liquidity and Refinancing - Investor concern that GMG will need to raise more equity capital in the short term (i.e. next 6 months);

Investors looking at longer term funding (FY10 and beyond); and

A lack of understanding over the debt profile within GMG's managed funds, as well as the perceived threat of redemptions, and the impact this will have on GMG's business model.

GSJBW Comment:


We estimate GMG's gearing increases to 45% (vs 60% covenant limit) after allowing for a "bear case" >$2.1 bn decline in assets due to (1) the MTM of its investments in IIF and J-REP, (2) 150bps of cap rate softening across the portfolio, and (3) a 100% write off of intangible assets. In our view, covenant gearing is not the issue.


Management indicated in its market presentation of 28 Oct 2008, that post the equity raising, GMG has ~$1.3bn of liquidity which will provide sufficient funding to meet its capital obligations and debt expiries until Dec 2009 (assuming ~$680m of debt expiring by Dec 2009 cannot be refinanced). In our view, a further capital raising in the next 6 months is unlikely, on the assumption that GMG:


(1) Continues to wind back its development pipeline, and


(2) Can achieve further asset sales.


We suggest that if more capital is needed, GMG would look to cut back its dividend rather than raise further equity. On this basis, investors are possibly starting to factor in the increased risk of yield support being lost.


Based on fundamentals alone, at its current price GMG is screening as very cheap. However, in our view, GMG's share price will not have a meaningful recovery as negative market sentiment (rightly or wrongly) over GMG's capital position and earnings outlook will continue to weigh heavily on the stock. Catalysts for a recovery include:


(a) The successful refinancing of pending debt expiries;


(b) HY09 results confirming that GMG is on track to meet FY09 guidance, and


(c) core earnings guidance for FY10.

12 Month Target Price: $1.37

Recommendation: Hold
Share price: $0.51