Forum Archive Index - September 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi All,

Macdunk asked for the low down on forestry so this is one dogs take 
on it.   Long time readers of sharechat will know that I have admitted to 
being a shareholder in Carter Holt Harvey.   Others have asked why as 
it doesn't fit either my two portfolio objectives of being either a high 
yield company or a growth business with high ROE.

Apart from dragging out the old Brierley Investments excuse, whenever 
BRY announce another poor result ('it's a legacy issue'), I did see CHH 
as one of the few ways to invest in the primary production sector of this 
country.   Fronterra and all its ancestors are/were co-operatives, and I 
don't exactly have the time, inclination or skill to run a farm myself.    
So CHH it was.    It doesn't matter whereabouts you drive for your NZ 
holiday. The chances are you will drive through or end up next to one 
of the CHH forest blocks.   Anyone who has ever driven through any of 
these forests must be deeply impressed with their scale.   Couple this 
with the fact that even if the wood price tonne remains static, that ideal 
growing climate will see your investment grow anyway.  So it is hard to 
think that this industry is not one you should put at least some of your 
investment money.   However, the longer term experience has proved 
otherwise.

Just to prove I have been with CHH for a l-o-n-g time (a time I knew a 
lot less about sharemarket investing than I did now) I remember the 
time International Paper seized control of this outfit.   They offered $4 
per share I think it was, for those shareholders willing to sell out.   This 
was about ten years ago and look where the share price is now!   At 
the time I remember thinking that if a big American ouitfit like IP 
wanted to come on board, it must be good enough for me to stay there 
too.  Ah well, enough said.

The main problem with growing trees in NZ is that international 
customers want 'em cheap and we are a long way away from those 
international markets that will pay.  I know there are negotiations going 
on to allow the use of products such as our pine (softwood) as housing 
construction material in China.   Of course, we would still have to 
negotiate with the Chinese to allow us to do more of the timber 
processing in NZ to get the maximum benefit for our country.  

'I hear' stories about cheap Russian wood depressing prices on the 
other side of the world.    I think at one point we even had someone ex 
one of those former Soviet states make a contribution to this forum so I 
would be very interested to hear some more 'first hand' information on 
this.

There is some evidence of the long term decline of wood in its own 
stronghold of NZ.    I watched in amazement as a house was built just 
around the corner from me with entirely steel framing ( I think 
'Strongway' is the firm that does this).    That place looks like a 
builder's spec job.  So if our own builders are now by-passing the use 
of timber in framing completely, what does that say for the future of 
timber in the New Zealand building industry?   Maybe Macdunk would 
like to comment!

Personally, antics of Fletcher Forests over the last year excepted, I 
don't think that NZ forestry companies are run by idiots.   The problem 
is that 'forestry' in general is a weak commodity business.   To use one 
of Warren Buffett's quotes, when good management takes over a 
fundamentally weak business it is usually the business that leaves this 
partnership with its reputation intact.

Having said that, I am consistantly impressed that the management of 
Carter Holt, at least, do seem to be aware of the direction they need to 
head.   They have set strict goals whereby new investment must beat 
its cost of capital.  They seem to have the discipline to 'not invest' 
when a project doesn't stack up.  They are cutting costs from the 
business as fast as they can.  Yet as fast as they do this the market 
price falls leaving their margins squeezed.    This really is a very tough 
business and the next bogey man on the horizon is greatly increased 
power prices.   Where will it all end?

If Carter Holt is the best of the NZX forestry bunch, and I think it is, 
what does that say for the industry as a whole as an investment 
prospect?

I think you might have it right on this one already MacDunk.   Keep 
clipping the ticket on those logs as the roll overseas via the Port of 
Tauranga.    Though it must be said I was in Lyttelton over the 
weekend and was impressed at the number of logs going out via the 
Port of Lyttelton gateway.  I'll be holding on to my investment in LPC 
for a while I think!

So why do I still hold shares in CAH?    It is quite hard to justify my 
actions by logical argument.   I think the reason is that the immediate 
future always seems to have more potential than the immediate past.
But perhaps it is just that dogs like trees too much!

SNOOPY


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on Pegasus Mail version 4.02
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"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


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