Gunns: Green shoots or heading for the pulp mill?

Gunns Limited (ASX: GNS) announced on 26th March 2012 that it was planning an equity raising of $400m, and looking for new investors. The funds will be used to finance the delivery of the controversial Bell Bay Pulp Mill in Tasmania.

The company has issued a stream of new shares over the last 5 years, with the share count doubling from 402m in 2007 to over 848m currently. No wonder the share price is down 95% over five years.

The share price is currently trading at 16 cents and its likely that the new shares will be issued at a big discount to the current trading price, which is likely to push the price down ever further. Current shareholders will likely see their shareholdings diluted, especially if the new shares are offered to new investors.

A proposed capital raising of approximately $280m in early February 2012 was slammed by institutional investors, who felt that the company was being given away at just 12 cents a share. Although Gunns disputes that, saying that the cornerstone investor, Richard Chandler Capital Corporation decided not to proceed as the investment did not meet its criteria.

It’s hard to see how the new $400m capital raising can be higher than 12 cents. To attract investors, the issue price needs to be at a discount to the current share price. And $400m is three times more than Gunns’ current market capitalisation.

Significant headwinds

The company is still facing significant headwinds, with the downturn in the housing sector reducing demands for its softwood products, and facing strong competition from imported products. Exported Australian hardwood products are overpriced compared to cheap products coming out of Asia, mainly Vietnam and Thailand. Gunns is currently in the process of selling off assets, with Green Triangle softwood forest estate sold for net proceeds of $120m in November 2011.

The company then sold its Jarrah saw milling, processing and retail business to Brickworks Limited (ASX: BKW) for $6m in Dec 2011.

As at end of December 2011, the company still had $586.7m of debt, although the company has stated that it expects to be debt free by the end of December 2012. This appears to be slightly fanciful, going by previous statements made by the company.

In an update to the ASX on the 24th November 2011, Managing Director Greg L’Estrange stated that the company expected to be net $185m in cash by the end of January 2012.

Legal actions

The company has been beset by issues in recent years. The former chairman John Gay is facing insider trading charges, after selling $3.1m worth of shares three months before the company announced a 98 per cent slump in earnings in February 2010. Mr Gay sold his shares at an average price of 90 cents.

The Bell Bay Pulp Mill faces opposition from the local community and conservationists. Legal action against Gunns was only recently dismissed in the Launceston Magistrates Court, but the company is facing a second challenge from the Tasmanian Conservation Trust in the Supreme Court, which has yet to be decided.

Foolish takeaway

The company has major issues with too much debt, falling revenues and profits and problems with its primary asset, the Bell Bay Pulp Mill. We don’t know whether this new equity raising will get off the ground, and even if it does, whether it will save Gunns from extinction.

If you are looking for ASX investing ideas, look no further than “The Motley Fool’s Top Stock for 2012.” In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

More reading

Motley Fool contributor Mike King doesn’t own shares in Gunns. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy

5 ASX Stocks for Building Wealth After 50

I just read that Warren Buffett, the world’s best investor, made over 99% of his massive fortune after his 50th birthday.

It just goes to show you… it’s never too late to start securing your financial future.

And Motley Fool Chief Investment Advisor Scott Phillips just released a brand-new report that reveals five of our favourite ASX stocks for building wealth after 50.

– Each company boasts strong growth prospects over the next 3 to 5 years…

– Most importantly each pays a generous dividend, fully franked.

Simply click here to find out how you can claim your FREE copy of “5 ASX Stocks for Building Wealth After 50.”

See the stocks now