Listed companies cut down forests

By Peter V O'Brien

Friday 1st October 2004

The day could be coming when New Zealand has no stock exchange-listed vehicle in the forestry industry.

That proposition might seem outrageous, given the country's history of forestry development and the listed companies involved in it.

The facts suggest the supposedly outrageous could become reality because one of the five companies in the table has sold its forests (Tenon), the two farm forestry funds (Nuhaka and Opio) are the subject of takeover offers and the remaining organisations (Carter Holt Harvey and Evergreen Forests) have made cryptic comments about their forest interests.

Carter Holt's report for the six months ended June 30 included an interesting observation about forests, almost as an afterthought.

It said the company had acquired an 85% interest in the China-based Plantation Timber Products business for $US134 million and added:

"In addition, the company has begun a review of the appropriate ownership level for its forest state. We expect to update the market on this work in the fourth quarter."

The "fourth quarter" began today, running to December 31. CHH has seemed comfortable with forest ownership but nothing is immutable in the business world.

It was noted here (NBR, March 26) that Tenon chairman Sir Dryden Spring was blunt when he addressed the then Fletcher Forests special meeting, called to consider the sale of forests assets.

"Since the company was established as a standalone entity in 2001, the forestry assets have not earned the cost of capital," he said.

"Over the past decade, with the exception of a brief period in the early 1990s, the forests have never earned the economic opportunity cost of the capital invested in them."

Sir Dryden said the sharemarket had recognised that by discounting the shares significantly below asset backing. The market has taken similar discount action with the other companies and funds.

CHH has considerable diversification beyond forest ownership but last week the share price was $2.25, compared with the net asset backing of $2.95.

Evergreen's price was 34c, against nta of 51.9c, Nuhaka sold at $4.60 when nta was $5.34 and Opio's 79c unit price was at a solid discount to the $1.02 nta.

Carter Holt's "view of the appropriate ownership level" of its forests could mean, or result in, anything but it would hardly be a big surprise to see at least a partial disposal.

A company, following the Tenon precedent, could sell forests and free up capital while retaining cutting rights to satisfy its timber-processing requirements.

There are potential buyers in such circumstances, particularly US-based timber investment management organisations, which tend to be fund managers for pension funds.

The latter have different investment requirements from those of companies, usually having a relatively low cost of capital, being satisfied with lower returns and basically equity-funded.

Evergreen's biggest shareholder with 42% is Xylem No 1 Fund. The fund's manager is Global Forest Partners, which manages it for the Ohio State Public Employees Pension Fund.

The bidder for the Nuhaka Farm Forestry Fund is Rotorua-based GMO Renewable Resources, another organisation that traces back to fund managers for forestry investment funds.

Evergreen's latest comment regarding its future accompanied the preliminary report for the year ended June 30. It had completed an organisational restructure, announced in April.

Chairman Peter Wilson said the board was "actively addressing future options for the company" with the restructure completed and non-core asset sales under consideration.

Those comments were even more cryptic than Carter Holt's and could also mean anything.

City Forests, a wholly-owned trading company of the Dunedin City Council, made an offer for Opio Forestry Fund in August.

A statement made at the time of announcing the offer said City Forests had been harvesting forests in the Otago region for more than 60 years and owned and managed about 15,300ha of forest.

Such developments and the CHH and Evergreen comments suggest there could be more "rationalisation" of forest ownership, possibly leading to no listed forestry organisations.

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