Forestry scares investors

By Peter V O'Brien

Friday 22nd November 2002

Investors do not appear to share the optimism forestry companies expressed in recent reports and addresses to annual meetings. The table shows the share price performance of five listed groups between April, when The National Business Review last considered the sector, and last Monday.

Only Nuhaka Farm Forestry Fund had a decent price increase, although it reached a 2002 high of $10 earlier in the year. Carter Holt Harvey, Evergreen Forests and Fletcher Challenge Forests had unusually similar percentage price declines in the past six months.

The relationships between the companies' share prices and net asset backing was also unusual, in that all sold on Monday at solid discounts to asset backing based on latest published accounts.

Carter Holt's nta was $2.69, giving a share price discount of 36.8%; Evergreen's was 77c fully diluted (31.2% discount); Fletcher Challenge Forests' 41c (43.9% discount); Nuhaka $11.33 (18.4% discount) and Opio 93c (43% discount).

It was noted in April that weak international commodity prices affected company profitability and related share prices, but there had been an improvement in prices for logs and sawn timber in (then) recent months.

A general downturn in the sharemarket affected the sector's prices in the past six months but the NZSE40 capital index's decline of 5.1% was less than half the price falls in CHH, Evergreen and Fletcher Forests. Only Nuhaka and Opio outperformed the index.

Company reports were still optimistic about future prospects. Evergreen's annual meeting was told the forestry sector was challenging, but the company would continue to improve steadily its harvest capacity, seek to grow where growth would add value and focus on improvements in operating cash flows.

Fletcher Challenge Forests' meeting heard the company was "now well and truly established and a standalone company." The balance sheet was cleansed of the "legacy issues." Debt was modest and interest cover strong. Cashflow was also strong and there was a strong rise in operating earnings, although further improvement was required to achieve a satisfactory return on funds.

The market seemed to agree with those sentiments as it decided an appropriate share price. There was a 1c price rise the day after the meeting, supposedly related to comments about a change of strategy and a share buyback.

That assessment was doubtful, because only 415,700 shares were traded on November 14, out of 22 million ordinary shares on issue. Trades of 0.45% of capital, irrespective of an equal 4.5% movement in the share price, was hardly bullish. The latter was struck from a low base, as shown in the discussion about relationships between price and nta.

Fletcher Forests would buy back an initial $50 million worth of shares as part of a capital management plan to return excess capital to shareholders. Details would be announced in conjunction with the interim report in February. The company expected to follow the buyback with others.

Market conditions and the company's circumstances would determine the size, method and timing of capital return.

The ability to sell some forest assets on attractive terms was an example of the company's future circumstances.

There was an interesting comment about that point: "We are very conscious of the fact that so long as the company's share price remains at around its current levels [sic] there are likely to be potential buyers of parts of our forest estate who are prepared to pay prices for these assets which are significantly higher than the value ascribed by the market in our share price."

We come back the share price discount on net asset backing. The company was moving from owning forests to processing, based on long-term guaranteed wood supplies. That made sense, but comments about overseas markets seemed to have potential to make or break Fletcher Forests.

The meeting was told there was potential to expand involvement in distribution of mouldings in the US but China was the focal point. A small marketing operation had been established.

The company had only "scratched the surface" of that market.

Maybe, but shareholders will hope China does not become the financial graveyard for Fletcher Forests it has been for some other New Zealand companies.

Carter Holt Harvey has many interests other than forestry. The company was discussed in NBR on November 1 in the context of groups that are effective branch operations of overseas-based majority shareholders.

CHH's future will be decided in the US offices of International Paper and related to that company's worldwide strategy and financial health. Anyone who believes the local company has final power over its destiny is probably awaiting Santa's descent on December 25.

Forestry obviously has long-term prospects and investors must adopt an equally long-term, patient, approach to the sector

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