Gunns Upside A Question Of Timing

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By Terry Hughes

While assessing possible returns and opportunities in Gunns (GNS) Macquarie and Smith Barney Citigroup show that it all depends on your investment timeline.

Both brokers agree that the company’s proposed new pulp mill is economically viable and value accretive, but where they differ, is their expectations on the how this will affect the share price and over what time frame.

Taking a more long term approach, Macquarie calculates the mill will be breakeven at pulp prices of US$270-325/t, which is significantly below the current price of US$635/t.

The analysts expect a license to be granted for the mill by Christmas.

Citigroup is far less positive.

Although the analysts agree that the pulp mill is likely to proceed, they point out that approval has still to be granted, they question whether the project will stay within budget and highlight the fact that earnings from the mill are at least two and a half years away.

As such, Citigroup is of the opinion that the market will only be pricing in around 20% of the anticipated $1.25/share value in 12 months time.

However, the analysts have lowered their recommendation to Hold, High Risk from Buy, Medium Risk as in the mean time they expect excess chip capacity will have a detrimental effect on earnings over the coming three years.

As a result, they see consensus forecasts as too high and have lowered their target by 90c to $3.15, although they point out that investors with more long term perspectives could reap 37% upside over the coming three years.

While Macquarie concedes that the company’s woodchip business is under some pressure, the analysts are of the opinion that this is not "new news" and that investors should focus on the company’s ability to generate value from its Tasmanian timber resource, expressing the view that it is in a position to do so over the medium to long term.

Macquarie, not surprisingly, rates the stock Outperform with a 12 month target of $3.50.

Of the four other brokers and equity advisers in the FN Arena database that cover the stock, two rate it positively, one is neutral and one negative.

The average target on the stock is $3.49 and it is currently trading at $2.98.

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