Forum Archive Index - August 2000

[Mike Hudson <MHudson@placemakers.co.nz>]

Simon
Here is an extract from the Timber Federation's newsletter that hit my desk
this morning. I see that FFS's nta is supposed to be $1.42 but it all
depends on the basis of the valuation. Trees are notoriously difficult to
value

"Fletcher Forests - Sale Imminent?
NBR reports on FCF woes.
These of course have been well known to industry insiders for a long time
but only obvious to analysts after shareholders have lost their shirt.

We Quote
'The big mistake was the decision in September 1996 to buy the Forestry
Corporation's North Island forests. A consortium of FFS, BIL and China's
Citic paid just over $2 billion

The purchase was funded to the tune of $US700m as the partners were able to
convince the banks that they would be able to service the debt through rapid
harvesting of Douglas Fir from the CNI forests.

Then came the Asian crisis

Prices plunged and cash flows from harvesting almost dried up. BIL sold out
in 1998 booking a hefty loss and the other partners now owning half each
went into a huddle with their bankers.

In return for a $US126m cash injection from the partnership the banks agreed
to suspend principal payments until June 2000 to give log prices time to
recover. They have but not by enough to get Fletchers off the hook

Interest payments on FFS's own debt of $661 and CNI's $1.77 billion are
being capitalised, meaning that the debt mountain is growing higher by the
day. In the June 1999 year $56 million of interest was capitalised into
FFS's own debt and $135m into CNI's debt. Against this the division
generates net operating cash flows of only $69m and an after tax profit of
$56m.

In the first half of this year net profit before an abnormal gain of $11m
from a Chilean fire insurance payout was just $4m and net operating cash
flows were a wafer this $18m

This year it will have to pay $26m to the departing FLP division for tax
benefits attributed to Paper that will go to FFS.

Principal repayments- in US dollars bought with NZ pesos - have restarted on
the CNI debt. The banks won't forego their interest payments forever: and
the division needs cash to build more processing capacity.

So those log prices had better keep rising. The simple fact is FCL and its
partners paid too much for the CNI forests.

The question is how much pain will that mistake inflict on the rest of the
Group before it finally splits up.

Plainly FFS can't stand alone without recapitalisation in some form.

Citic could step in and buy FFS out of the CNI partnership. That would
remove the debt problem but would leave Forests a far smaller entity.

But anybody merging or buying would have to assume FFS's $1.5 billion debt
burden. Nobody should expect the shares to fetch the sort of premium to
market prices Norske Skog paid for FLP.

Another option is asset sales, that is selling whole forests rather than
logging them. The easy sales have already been done. The East Coast forests
raised $210m, the South Auckland forests went for $30m, and the Nelson JV
forests fetched $US185m.

But these thing take time and FCL has only five months until its self
imposed deadline for full separation. And Building and Energy are raring to
go their own ways'"

Good luck!
Mike H

 


----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join now.
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.