Forum Archive Index - September 2003

["David & Jill Stevenson" <djstevo@quicksilver.net.nz>]

Re listed Forestry Companies  as an investment- Most observers until now have awaited the establishment of an up to date benchmark for valuation purposes that recognises current phenomena impacting on the market rather than historical bases of the past  -primarily the phenomena of organic growth of stocks even while management slept (they can`t make many mistakes in that process).. The result of Fletcher Forests revaluation this week will achieve that .

Their present forest stocks have a book value ,I recollect , of $1.2 billion. The revaluation will reflect how out of kilter was that "estimate ".It will be exposed to critical market scrutiny. It may reflect current bids,if it has any, to entertain for the total estate which it  has announced plans to sell. That wholesale exit gesture speaks volumes about prospects as they see it.       Yes, they have made great mistakes in the past  - especially regarding the price they and BIL paid for purchasing the Central North Island Forestry partnership from the Government at what turned out to be a ridiculous  price. One of the few coups of that Government in the privatisation process... Quite ironically BIL displayed remarkable foresight in selling out of the partnership not long after that purchase. They were novices to the forestry industry yet showed greater nous and business acumen than the then Fletcher Board who , actually ,increased their holding `with BÌLs exit .The Fletcher Board embarked upon what Sir Ron Brierley would have called a"  systematic destruction of shareholders wealth" in their market naivety. Then, over intervening years watched their investment fragment.How good was that? It has been clear for a long time that the "emerging wall of wood "grown by the two market players and , perhaps, heedless  proliferating smaller partnerships would soon come on stream without providing for the huge accompanying infrastrastructural needs (estimated in the billions) involving processing plant ,cartage contractors, and roading. All in the context of uncertainty of land tenure rights,possibly increasing royalties to Maori and other authorities. The great uncertainty   Treaty of Waitangi encroachment  processes upon previously respected business expectation.

      Now that forestry exports are disproportionately in the form of logs to the Far east , that market now calls the tune. Years ago when Japan started buying NZ mutton we naively  thought all our birthdays had come at once. Not so - displaying Eastern guile, not unlike shrewd Arab thinking. .They retreated for a couple of years feigning disinterest . It was a market ploy - meanwhile we had geared ourselves to less reliance on Europe as a market  and focussed on the Far East . The yin and yan thinking to which we had not previously been exposed meant our sales people had to significantly cut FOB mutton prices to "regain "Asian interest. 

     The reason CHH have not fared worse than they have is because they have bought into forests and  log processing  companies in Australia thereby finding a ready market capitalising on the Australian construction boom . A risky foray into the politically and economically unstable Chile fortuitously helped. Furthermore , unlike Fletcher Forests and its original quarterizing from the original FCL whereby it  thereon stood or fell on Forestry and related industries , CHH is laterally more diversified into other industries sheltered by that swings and roundabouts philosophy.

     Factors impacting on Forestry not mentioned above also include the big unknown of vicissitudes in the NZ exchange rate an absolute unpredictable.Just look at the NZ/US/UK relativities over the last year. Also ,probably too obvious to mention,the distance from markets, other than Australia. Everywhere we look there is uncertainty !

 

                       David S.