Thursday, February 08, 2007

Tax changes cause concern for some shares

You will have surely heard already about the tax changes for non-agricultural schemes. If not I have added an excerpt below :

The ending of tax concessions for Australian agricultural schemes has angered MPs and the agribusiness industry. The Federal Government has decided that the Australian Taxation Office (ATO) can cease lucrative tax deductions for the managed investment schemes. The ATO will be allowed to run a test case against the industry. There will be no transitional arrangements to allow restructuring, leading to predictions of job losses. The announcement prompted investors to desert the sector, with the three largest listed schemes losing over $A400 million in value on 7 February 200
This is affecting some of the major players which have alternative investment schemes. Another quote on the shares affected is below :

The Australian Government's decision against non-forestry managed investment chemes (MIS) has caused the shares of several companies to fall. Both Great Southern Plantations and Timbercorp shares dropped sharply in response to the withdrawal of tax concessions on 7 February 2007. Great Southern closed $A0.34 lower at $A2.19 and Timbercorp plummeted $A0.77 to $A1.94. Non-forestry products, including wine grapes, olives and cattle, constitute up to 30% of Great Southern's sales. Companies that use MISs for forestry-related enterprises have not suffered
I have never said that Great Southern Plantations Limited (ASX:GTP) or TimberCorp (ASX:TIM) were good selections as they have always been overpriced compared to their peers in a very competitive marketplace. I have on the other hand considered Forest Enterprises Australia Limited (ASX:FEA) and TFS Corporation Limited (ASX:TFC) as excellent buys. Both of these stocks have performed well due to the undervalued nature of the investments. TFS is uniquely positioned in a profitable niche market that should guarantee success. The only issue I can see is that their location makes them prone to cyclone damage.

Still I have to think the government has the right idea here. People do not understand what they are doing when they invest in these schemes in the hope of saving some tax. While I don't see cattle or grapes as a terrible investment I do see olive farming as purely horrendous.

So lets look at this from a fundamental perspective. How can we make a profitable opportunity out of this ? Firstly stay away from those companies that are focused on olive farming, cattle and grapes. That's easy. But where is the profitable position that can arise from this ? To find the profitable position we need to see where these products were used. The easiest ones are cattle and grapes.

Cattle are sold for meat and thus less people investing in these forms of investment will push up meat prices again (and the drought will also help with this). If you can find a company that uses and sells cattle. Graincorp Limited (ASX:GNC) is one example but it is overpriced at the moment. We need to also find a sector which is depressed.

Grapes are used mainly for wine. The wine industry has recently been struck by a glut of grapes causing unprofitable situations. This should now start to be relieved and we should see the wine companies coming into a boom time in the next few years. This sector is currently depressed so we should be able to get a bargain. Take a look around and see what you can find , you may even find those companies providing services to the wine makers are at a bargain price. One that comes to mind is Challenger Wine Trust (ASX:CWT).
Good Luck Investing.

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