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Forestry company shares languish

By Peter V O'Brien

Friday 28th March 2003

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Forestry, its production and export income are major contributors to the economy.

Investors probably agree with that assessment but their treatment of listed companies' shares over the past year suggests they had little faith in translating economic importance into profit growth.

Only Carter Colt Harvey's price improved since mid-November, when the sector was last analysed. That company has substantial diversified industrial interests as well as its forestry and forest products activities.

The latest price changes (see table) followed similar alterations between April and November 2002. CHH declined 10.5% in the seven months, Evergreen Forests 10.2% and Fletcher Forests 11.5%. Nuhaka Farm Forestry Fund gained 12.8% and Opio Forestry Fund 1.9% but both improvements were wiped out in the ensuing four months.

The industry had several problems: declining commodity prices in recent years; unprocessed or semi-processed wood; the rise in the New Zealand dollar and limited international economic growth.

Those matters were outside the industry's control. Cognisance of rapid growth in wood supplies over recent years were within their control, as was maintenance of processing facilities.

A wider issue of infrastructure has affected the forestry industry's growth over the years. Many forests are grown on land unsuitable for other primary production, often in relatively isolated areas.

Product must be transported to ports and/or mills. Rail transport from those places is either rundown, non-existent or a mess. The condition of New Zealand's secondary and tertiary roads has similarly deteriorated, a constant flow of massive logging trucks aggravating the problem.

The industry and those responsible for basic infrastructures need to deal with the problem quickly or some New Zealand forest operators could be in trouble.

There are positives. Forests do not need to be cut on a specific date. Trees can stay in the ground beyond their basic harvest times, adding more harvestable timber against market improvements.

The relatively long maturity time gives more leeway, particularly when the spurt in plantings is taken into the equation. World wood product demand will outstrip production over the next 10-20 years, given opposition to destruction of non-sustainable tropical forests.

It is unlikely investment share demand will outstrip supply in the near future, except in well-managed farm forestry funds and syndicates, because equity investors have eyelid-blink attention spans.

They blinked this week when Fletcher Forests partially revealed an activity split between forest ownership and other activities. The move was foreshadowed last year but Monday's announcement was still vague.

Macquarie New Zealand will submit a new structure for approval. The adviser can be presumed to know its business, but if it noted outside advice, it would avoid any proposals that had connotations of the old Fletcher Challenge "letter stocks."

Perception is the key to these matters. Any perception ­ valid or invalid ­ of new letter stocks would be counter-productive.

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


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