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Fletcher Forests to decide what to do with millions


Thursday 22nd August 2002

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Fletcher Forests is to decide in the next six months how it might spend $50 million to $100 million available to it.

Chief executive Terry McFadgen today said debt reductions meant the company now had significant financial flexibility, allowing capital management options, including some further expansion in processing, or potential distributions to shareholders.

In the next few months, the board would be looking at the total issue of capital utilisation.

He said the company would be comfortable moving its debt level from the present two times ebitda (earnings before interest, taxes, depreciation and amortisation) to closer to three times, he said.

That implied a balance sheet capacity of $50 million to $100 million, which was the size of the resource available for such uses as further processing or redistribution.

With no imputation credits available to the company, a dividend was unlikely to be an attractive way of making any distribution. A share buyback might be a possibility, Mr McFadgen said.

Results released today for the year to June showed Forests made an after tax net unusual loss of $249 million.

That included an unusual item loss of $324 million, principally relating to the write-off of the balance of the company's subordinated debt to the Central North Island Forest Partnership.

Excluding unusual items, earnings before interest and tax was $136 million, including a forest crop revaluation of $53 million. The $83 million ebit without the revaluation compared to last year's figure of $17 million.

Chairman Sir Dryden Spring said the company knew it could do better than a share price of around 22 cents, when the net asset backing of the company was about 41 cents a share.

The discount to the market was the result of a combination of two or three things.

Firstly it had been uncertainty over the Central North Island Forests, and what the impact would be on Forests if it lost the management contract for that estate, he said.

Effectively Forests had $30 million of overhead costs charged both to its own forests and to the CNIF that in the absence of the management contract would have to be charged back against the company's own forests.

Mr McFadgen said the company managed the CNIF estate at the discretion of the receiver, who could elect to terminate the contract on reasonable notice.

The possibility of losing the contract had been identified as a risk factor, and were it to happen there would a $10 million to $15 million negative impact on Forests.

Sir Dryden said a second factor affecting the company's share price was that it was a new company and needed to develop a track record of performance.

"We, I think, understand very clearly that as we get that track record of performance, then, and probably only then, can we expect to see that discount to net asset backing in the share price removed."

The company had only been in existence for a little less than 18 months, and last year had tidied up the balance sheet, moving its policy on forest valuations to one that reflected the market value of the forests, rather than the historical value of how much money had been capitalised into it.

Shareholders and the market should focus on the underlying performance of the company, now earning a little under 10 percent on the capital employed in the company, he said.

Mr McFadgen said Forests used a weighted average cost of capital of around 8 percent, rising to a nominal figure of a little above 10 percent after tax when inflation was included.

With the company now running around 9.5 percent, it was close to a cost of capital return.

"We want to, and need to substantially exceed the cost of capital return in order to generate some good value for our shareholders," he said.

The company's aspirations were to reach a nominal figure around the mid-teens, in two to three years.

Growth in return could come through three mechanisms, Mr McFadgen said.

"First we have an increasing component of pruned wood flowing through, and that in turn adds some margins as it goes through the add value side of the business.

"Secondly, we do think the progress that's been made over the past 18 months in industry export marketing will continue to bear fruit," he said.

"The third element is obviously costs. That's an area where further industry co-operation has the ability to take out some more dollars."

Sir Dryden said that until 17.6 percent shareholder Rubicon's house was in order, the options available to Fletcher Forests were reduced and the company would be constrained.

"We have it within our own power to create value for our shareholders, but some of these structural things will limit what we can do."

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