Carter sketches long-term plans but shareholders look short term

By NZPA

Saturday 23rd October 2004

Carter Holt Harvey gave an insight into its future direction at its third quarter announcement this week, but that didn't stop its shares being caned after the result.

The US-controlled company said it would sell a third of its 330,000ha forest estate, was likely to build a $100-150 million sawmill in New Zealand and is contemplating something bigger in China.

The wood processor's shares were sold down 16c on Wednesday and 9c Thursday before clawing a couple of cents back on Friday. The main concern seemed to be the quality of its operating profit -- down to $71 million from $89m a year earlier -- which was bolstered by a $24m gain from foreign exchange hedging.

The headline figure made worse reading -- a $87m net loss thanks to a $128m tax provision arising from the planned sale of its forests.

Citicorp cut its 2004 earnings forecast by 14% to $155m and its 2005 estimate to $21m in the wake of the result. It lowered its valuation of the International Paper-controlled stock to $2.60 from $2.65.

Chief executive Peter Springford said the current quarter was proving challenging due to the high dollar, high freight rates a credit crunch in China and low pulp prices.

It was probably this short-term outlook that caused investors to sell rather than the news that the company would only sell a third of its 417,000ha forest estate.

But Macquarie Equities NZ investment director Arthur Lim said the forest sale, expected to net around $400m, was about half as big as the market had expected.

"The market prefers cash in the hand. It now has to judge Carter Holt as a forest cycle play rather than an asset sale play," Lim said.

However, another analyst told NZPA it was unlikely CHH would sell its 163,000ha prime Kinleith forest and the planned sale was precisely on his expectation.

One problem was that the forests being sold in the east coast of both islands and around Auckland, were low quality, mostly on leased land and the price would be adjusted according to who paid the deferred tax.

Of disappointment to some investors as well, was Springford's announcement that he has no intention of handing the cash back to shareholders.

"Investment opportunities would be our first option," he said.

He confirmed the company had plans for a "monster" sawmill to be sited either in Kinleith or at Marsden Point. The siting will be of huge interest to both communities as it would process up to 800,000 tonnes of logs and create a large number of jobs. The area that dips out will have to seek investment elsewhere to process the logs coming on stream.

Northland's wood comes into full production in 2008 and its dense wood was attractive as it can be processed into structural products. As well, the new Marsden Point port facilities were an asset.

Springford said the company was also mulling other processing opportunities in China following its US$134m ($208m) purchase of 85% of a wood panel business in August.

That would seem to be the pattern of the future investment -- one quarter in New Zealand, three quarters in Australia, China and elsewhere.

Springford confirmed CHH had also put 9500ha of land in the central North Island up for conversion to dairy.

In August, state-owned Landcorp said it would convert more than 20,000ha of cut-over forest on the Volcanic Plateau to dairy, suggesting a trend out of forestry and into higher yielding dairy.

A 2003 Massey University study found investors could pay $4-5000 per hectare for an economic conversion of land covered in stumps and forest waste. Given the rise in dairy prices and the poor returns on forestry, the economics of those figures may have improved.

CHH's planned sale of forests follows three recent large forest sales.

Tenon earlier this year sold 107,000ha of forests for $725m.

Two other sales were each precipitated by receiverships arising from hard times faced by the industry. Late last year, the Central North Island Forest Partnership sold its 165,000ha Kairangaroa forest to a Harvard University endowment fund for US$650m ($950m).

In August, 33,000ha of forests on the East Coast were sold by the receivers of China's Hugaguang Forests to Ernslaw One, a company owned by the billionaire Tiong family of Malaysia.

These big forest sales reflect two trends in the industry. Firstly, investors who lack a long-term outlook are getting insufficient returns from forest ownership. Owners figure they can extract higher value by selling them to a `natural owner" such as a pension fund, which would look more at the longer term.

These so called Timber Industry Management Organisations -- such as Harvard and Prudential -- are content with an 8-9% return over 20 years, whereas a listed company has a shorter term focus.

Secondly, some companies such as Tenon, formerly Fletcher Challenge Forests, and CHH, are wanting to decouple from the forestry commodity cycle and in the case of Tenon, unwind its vertical integration.

Tenon wants to concentrate on high value processing. Yesterday, a tender closed for three of its sawmills that have a combined value of $150m and are not considered integral to its strategy.

CHH has retained the forests needed to supply its Kinleith and Tasman, mills.

Ernslaw, whose owners have massive forests scattered around the world and owns 53,000ha of forests in other parts of New Zealand, plans a $30-40m sawmill on the East Coast that would create between 100 and 200 jobs. It is considering building a veneer plant at a later date.

Rob McLagan of the Forest Owners' Association said that most primary industries, with the notable exception of wine, had separate growers and processors.

"What you are seeing is companies focusing on those things they are best at, whether growing trees or taking those trees and converting them to a number of end uses."

He said there was no concern in the industry that forestry had lost its lustre with forests being converted to dairy.

Of more concern was the failure of the Wood Processing Strategy, set up by the Government three years ago, to come anywhere near its goal of having capacity in place to process half of the "wall of wood" coming on stream.

"It is not happening enough."

He blamed the Resource Management Act, new labour laws and the lack of infrastructure.

"The relatively small amount of investment that is taking place would suggest that the investment climate in New Zealand is not good at the moment compared to say Australia and that must be a concern to everybody."

There was a "significantly shortfall" in the level of investment, both greenfield (new plants) and brownfield (development of existing plants).

Kevin Hing of the Timber Federation said the "wall of wood" was a bit of myth as forest owners were responding to the hard times by leaving the trees in the ground.

"People have been talking about the `wall of wood' but the reality is a little bit different."

Leaving the trees in the ground just means there will be more wood available later, said one analyst, who declined to be identified.

"Processing investment has been very slow in coming simply because the returns are too low."

For the same kind of reasons and ones specific to CHH, he remains quite negative on that company.

"While the sale process is expected to unlock some value, we remain cautious on the outlook for CHH," he wrote before yesterday's announcement.

"The quality of the operating earnings remains poor and CHH continues to struggle in the face of forex and rising costs," he said.

The company's challenge was to ensure that productivity gains and commodity price increases more than offset the effects of the strong currency and rising costs.

"Risks to our earnings forecasts lie very much on the downside and could possibly negate any value unlocked through a partial sale of the forest estate," he wrote.

He had a "hold" recommendation on the stock.

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