MIS growth tipped before ATO acts

Managers and promoters of agricultural managed investment schemes are expecting a significant growth in sales this year before the Australian Tax Office removes tax deductions for non-forestry projects.

Contrary to prior expectations, total MIS sales for 2007 are forecast to jump by more than 20 per cent on last year, to between $1.3 and $1.5 billion, according to leading specialist MIS research house, Adviser Edge.

The majority of that growth is expected to be in the non-forestry sector, which includes olives, wine grapes, fruits, vegetables and nuts and accounts for 68 per cent of the total number of agri-MIS projects.

With the ATO expected to rule on a likely transition period in the coming weeks, analysts are tipping a 12-month period as the most likely outcome.

Adviser Edge managing director Shane Kelly believes the uncertainty will lead to more products being sold than would normally be the case.

This is despite some promoters having put their capital expenditure programs on hold pending the government’s decision, or cancelling orders for trees destined for 2008 projects and beyond.

“People will be wanting to take advantage of the fact that there’s quite a diversified investment market now, and there may not be in two years’ time,” Mr Kelly told WA Business News.

Australian Agribusiness Group executive manager Tim Lee agrees, believing it will be business as usual for the about 30 agri-MIS promoters this year trying to sell their 2007 projects.

“We’re certainly expecting more sales this year than last year, whereas prior to any of these announcements we were predicting similar sales to last year,” Mr Lee said.

He said that, while the ATO had initially indicated it would not release any product rulings after July 1 2007, he believed the industry would be granted a 12-month reprieve.

Add to that the pending outcome of a proposed test case, and the likelihood of a high court challenge to the draft tax ruling, and the industry is unlikely to see any changes implemented until 2008.  

“Investors by their nature, if they know something’s potentially going to close they will probably want to get a bit more of it,” Mr Lee said.

“That’s not necessarily what we’ve observed already, but that would be my gut feel on what the likely impact will be on sales.”

The strong investor interest is already evident with the early closure of Great Southern Ltd’s 2007 beef cattle project, which closed over-subscribed late last month.

As the country’s largest MIS operator, with a 40 per cent share of the market, Great Southern Ltd executive director Cameron Rhodes said the company was expecting strong sales across both its forestry and non-forestry products this year.

 “There’s strong market demand out there for product,” Mr Rhodes said.

“The economy is strong, and we’re very confident of achieving growth in our total sales compared to last year.”

With 59 projects on offer in 2007, including 13 from Western Australian-based promoters, Mr Kelly said the biggest growth areas were in horticultural sector.

He believed that, up until now, the trend had been moving away from timber and more into non-forestry projects, which was one of issues the government had been grappling with.

“There’s been lot of interest in nut crops – almonds, walnuts, macadamias,” Mr Kelly said.

“There’s also been a lot of interest in high value horticulture – avocados, mangos, stone fruit, apples. That’s where real growth is going to come from in the sector.”

WA will continue to play a major role in the MIS sector, with Perth-based Australian Agricultural Contract Ltd’s grain co-production project and Arafura Pearls Ltd’s pearling project proving attractive this year.

Last year, WA housed the largest area developed to MIS projects in the country at 53,000 hectares, or 40 per cent of the total number of hectares developed as a result of the 2006 capital raising year.

“MIS effectively started in WA. That’s why WA continues to be a strong participant in the marketplace,” Mr Kelly said.

On the forestry side, growth is trending towards high value, long-rotation tropical timbers such as teak, mahogany and sandalwood, particularly from the strong tropical and sub-tropical regions of Kununurra in WA’s north, and northern Queensland.

“If that tropical timber market continues to develop, there’s going to be a lot of investment in those areas,” Mr Kelly said.

“We think that post the [tax] change, when they take out non-timber, that’s the area where you’ll see growth.”

Great Southern has also identified the growth potential of this emerging market, introducing a new high value timber project this year.

Great Southern’s Cameron Rhodes said investors had shown keen interest in the company’s new timber project, which was focused on growing mahogany and teak in northern Australia.

“The majority of supply [of tropical timbers] still comes from illegal logging from places like Indonesia. So the world’s supply is starting to diminish rapidly,” he said.

“It’s an enormous opportunity to start to get some large volume plantation species grown.”

TFS Corporation, which controls the world’s largest managed Indian sandalwood plantation, is gearing up for an almost 20 per cent increase in sales on 2006.

It is expecting to sell up to 385ha for its Kununurra sandalwood project, generating close to $24 million of capital.

Last year, the company generated just over $20 million worth of MIS sales.

TFS executive chairman Frank Wilson said investor interest in this year’s project was strong, as market demand for sandalwood continued to far outstrip supply.

With the company’s first sandalwood project expected to reach maturity in four years, early investors are gearing up for IRRs of at least 15 per cent, according to an independent project review by Lonsec.

Indian sandalwood is currently fetching prices of up to $110,000 a tonne, on a 23 per cent average compound price increase over the past 15 years.

“We’re in the fortunate position of being a price maker not a price taker; so we’ve decided to not lock in any forward sales,” Mr Wilson told WA Business News. “The market’s looking very good.”

With a land bank now of more than 3,000ha in the Ord River irrigation area, the company is aiming to a become vertically integrated processor and manufacturer of sandalwood and its associated value-added products.

“We don’t see ourselves as being a long-term MIS company,” Mr Wilson said. “The real gains for the company are not dependent on increasing MIS sales, they are dependent of the strength of the sandalwood market.”

The MIS industry is no stranger to ATO regulation. In 2000 and 2001, the ATO and the federal government staged a crackdown on the tax-effective schemes, leading to a drastic reduction in capital raised from $1.2 billion in 1999 to $300 million in 2002.

Investor confidence eventually returned three years later, when capital raisings rose above $1 billion.