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Opinion: Carter Holt Harvey Going Nowhere Fast

By Simon Louisson of NZPA

Friday 22nd April 2005

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During the March quarter results briefing he said there had been productivity gains in almost all units.

But CCH's shares have lost a third of their value in the last year. They slumped 5% to a two-and-a-half year low of $1.80 after the result on Wednesday.

The quarterly net profit before forest revaluations fell 36% to $25 million.

CHH shares have been mired through the 2000s between $1.67 and $2.72.

Ten years ago the price was $4.58 when US forestry giant International Paper bought a controlling stake.

In the last year, Fletcher Building's market capitalisation has risen $800m to $2.9 billion while CHH has dropped to $2.3 billion from $3.5 billion. (CHH was affected by a $480m capital return, the proceeds of half the sale of its tissue business.)

Last month the company issued a profit warning, cautioning investors the March quarter operating profit would be $45-50m against the $77m a year earlier. The result came in at $49m, but analysts queried the quality. It included $31m of foreign exchange hedging gains and $11m of land sales.

The warning had alluded to slow sales in Australia but analysts were taken aback by the full extent of the haemorrhaging there.

On revenue of $423m, the wood products division -- touted as a prime jewel in CHH's crown -- had an operating profit of $2m. Take away $6m of foreign exchange hedging gains and the result was decidedly poor. That, at a time when house building in New Zealand was extremely buoyant.

One analyst said even allowing for some maintenance programmes being advanced to reduce supply, the result was "pretty grim".

On the face of it, the underperforming forest division produced an improved $23m net operating profit (against $14m a year earlier) but when $10m of foreign exchange gains and $11m from the sale of land are subtracted, the result falls into the same category as the wood products division.

CHH has already wielded the chainsaw to the Australian wood products division with 300 job cuts and Mr Springford promised a further 100 to be slashed from the panels division in Australia.

Problems in the forest division are being addressed by selling around a third of CHH's 330,000ha forest estate, in the books at $1.5 billion. Production will be cut again as well. It has been cut by 200,000 tonnes to 4.7m tonnes in the last year and that will be reduced again in the current year. In 2002, the company was milling 6.5 million tonnes. Revenue in the forest division was down to $92m in the March quarter from $127m a year earlier, largely due to the reduced forest harvest.

The company said little about its planned forestry sale except to say there was good interest (as they would say), and that a further announcement would be made in July.

First NZ Capital analyst Andrew Mortimer said the sale of the forests was the key to CHH's share value.

Although CHH is controlled by a US company, Mortimer said it appeared other US investors that had recently bought forests in New Zealand had shown the ability to remove more costs from such operations by slashing infrastructure.

"If they can sell the forests at something that validates a higher value, then perhaps the rest of the company looks a bit cheap," said Mortimer, who rates CHH stock an "outperform" largely on this basis.

"If you take the underlying businesses for what the company believes they can earn, then you do get a slightly different outcome because the forests are main drag in terms of earnings."

With Australia likely to remain sluggish, although less so than in the first quarter, a slowdown in New Zealand looming in the second half, and the exhaustion of much of the profit-insulating foreign hedging contracts due to occur next year, CHH's outlook might appear quite gloomy.

However, Springfield was quite upbeat.

He advised analysts to stick to their full year operating profit forecasts of around $300m.

"We are expecting weak demand in Australia, but not as dramatic as in the first quarter. The second half of the year will be somewhat stronger," he said.

He suggested that when the exchange rate returned to its long term trend line -- around US58c against nearly US73c today -- "then we will be in good shape to benefit from it".

An exchange rate of US58c would add $100m to the bottom line.

The key is if CHH can get a more favourable currency environment, said one analyst. But he said the danger of pinning hopes on that, was that CHH's export commodity prices were likely to decline as the dollar recovered.

CHH's Australasian export wood businesses lost $24m last year while the recently acquired PTP in China made $12m in the six months CHH has owned it. Springford said there were no plans to move production to China as it made sense to have production close to markets, he said.

Independent analyst Brian Gaynor is pessimistic about CHH. He has slammed management for lacking a clear strategy to reverse the group's dismal performance.

Although part of that performance can be put down to depressed global prices for pulp and paper, high shipping costs and the weak US dollar, Gaynor is critical CHH failed to profit from the housing boom in Australian and New Zealand in the early 2000s. Fletcher Building's building products division had achieved far superior margins to CHH.

Another analyst said CHH's problems simply reflected the nature of the business.

"It's a commodity price taker. At the end of the day, that's what they are -- they can't get any pricing power.

"The industry dynamics are not positive at all. The long-term outlook is for more of the same."

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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