Diversification plan comes at a cost

The federal government’s February 6 announcement that the ATO would cease issuing product rulings for non-forestry managed investment schemes after July 1, thereby removing the 100 per cent up-front tax deduction, sent shockwaves through the industry.

Hardest hit were the ASX-listed MIS companies, which reportedly lost more than $400 million of their collective value.

Shares in WA player Great Southern Ltd, the sector’s largest operator, dropped 34 cents to $2.19.

Great Southern Ltd was somewhat insulated from the blow because about 70 per cent of its business is in the forestry sector.

But the sector’s second largest player, Melbourne-based Timbercorp Ltd, which had also diversified from its traditional timber plantation business in recent years, was hardest hit. Its shares dropped 77 cents to $1.94.

Emerging WA-based MIS company Arafura Pearls, which had only listed at the end of 2006, fell four cents to 14 cents.

But the forestry players, including Tasmanian-based Gunns Ltd and WA-based sandalwood project operator TFS Corporation Ltd, remained largely unscathed.

The listed companies clearly dominate the MIS sector in terms of the amount of capital raised from project sales.

While listed MIS companies represent only 23 per cent of the total MIS operators, and 35 per cent of projects, combined they raise about 80 per cent of the total capital, according to the Australian Agribusiness Group.

The share market outlook for the sector is mixed, with the uncertainty surrounding the ATO’s final decision being reflected in the market.

Bell Potter Securities’ Matthew Ward said the ongoing uncertainty made it difficult to forecast the share price movements for the MIS companies.

“There’s a lot of uncertainty until the government finalises the outcome for non-forestry,” he said.

“The share market doesn’t like uncertainty.”

Companies with non-forestry elements to their business, identified some years ago as the MIS sector’s biggest growth area, are likely to be punished for their diversification if the tax changes go through.

Another analyst told WA Business News he began to lose confidence in the sector about two years ago, as MIS managers began to drift away from their traditional forestry bases.

He believed, at the time, that the timber MIS sector had a longer term appeal than the non-forestry sector, with timber having a more rational base with regard to market demand and less risk of depressing market prices due to its longer growing cycle.

 “The great risk of any agricultural scheme is if you depress the product price in a serious matter,” the analyst said.

Sentinel Stockbroking chief executive Norm Robinson said the share price of MIS companies ultimately hinged on the fundamental nature of their business, in addition to what transpired at the ATO.

“The price reflects the fundamentals – if certainty can resume and fundamentals remain strong, then share prices will reflect that positive impact,” he said.

The value of MIS companies is also likely to be affected by the prevailing market conditions, which have become less certain in recent weeks.

“We’ve had two weeks of falls. General market sentiment is no longer running at its peak and these companies get swept along with that. So it’s a double negative,” Mr Robinson said.

He said the industry was also fighting a degree of scepticism within the market towards its business, which was seen as unquantifiable and highly volatile.

“The stock market tends to shy away from agriculture and agribusiness in general,” Mr Robinson said.

“It is also highly dependent on the economic environment, the profit of the population and the users of their product.”

With forecasts of strong project sales this year for both forestry and non-forestry projects, Mr Robinson believes the share prices are already reflecting positive expectations and the likelihood of good results for many MIS companies, on the back of strong demand for product.