Forestry firms' shares on rise after earlier clearfelling

By Peter V O'Brien

Friday 14th April 2000

Forestry companies' share prices performed poorly in the eight months since the sector was examined in The National Business Review, August 13.

The table shows the current prices, the percentage changes since August, the 1999/00 highs and lows and the percentage change from these lows to this week.

While the prices this week were in most cases substantially higher than their lows for the past 16 months, there was a decline since August, particularly in relation to the change in the NZSE 40 capital index.

Fletcher Paper was included in the table for comparative purposes. The stock is not a forestry operation, but its products are wood-based. Fletcher Paper's solid price rise recently was the result of the deal struck with Norwegian company Norske Skog (see The O'Brien Column page 51).

The deal was attractive to shareholders, given that last August the institutional minority shareholders in Fletcher Challenge Canada decided to block the proposal to merge the paper division with the Canadian group at a price of $1.79 a share, compared with the currently proposed $2.50.

Shareholders in Carter Holt Harvey would be disappointed at the performance of their company's share price over the past eight months, although CHH's product mix makes it more than just a forestry/timber play. The group's profit for the nine months ended December 31 was a substantial improvement on the corresponding period of the previous year at $145 million, compared with a mere $25 million.

CHH acknowledged it still had to do better, saying "driving performance improvement to earnings will also remain a priority for management."

The company's forests business group saw a continuation of strong performance in export log markets, with sales volumes the highest ever in any quarter at 494,000 tonnes and higher prices being obtained in the key Asian markets.

Figures for CHH's total forestry harvest were also interesting. The company said it harvested 1.4 million tonnes from its own forests in the December 1999 quarter, 6% higher than for the same quarter of 1998, while the harvest for the nine months ended December was 4.3 million tonnes, already more than the total harvest for 1995, reflecting the company's increasing harvest profile from its sustainably managed plantation forests.

CHH's balance sheet at March 31 should be stronger, because it will have accounted for the proceeds of the sale of investment in the Chilean company, Copec, for $US1.23 billion.

The price was above CHH's book value of Copec and the proceeds would be used initially for debt repayment and to fund investments to "build shareholder wealth in the future".

There was $3.21 billion of long-term debt on CHH's balance sheet at December 31, compared with $2.97 billion a year earlier and $2.95 billion at March 31, 1999

That was not excessive, because the company still had a proprietorship ratio of 56.6% December 31, but was $132 million of net interest costs in the nine months' period and $157 million in the full year to March 1999.

Reduction of that amount should give group profit a reasonable boost, apart from any gains from improved trading conditions.

Fletcher Challenge Forests' half-year report revealed net earnings of $4 million, before unusual items of $11 million, an increase of $1 million on the first six months of the previous year.

The cyclical nature of the forestry industry, including a slump in log prices in 1997 in the wake of the Asian economic crisis, was responsible for the dreadful return on a net equity investment of $1.22 billion at December 31.

Market interest in Fletcher Challenge Forests is now based on what is likely to happen to the operation as part of the total group reorganisation which kicked off with the proposal for Norske Skog to acquire the paper shares.

It is clear the net book value of Fletcher Challenge Paper shares is worth considerably more than the 76c being paid on the market earlier this week, but investors will want to see some concrete proposal for the business before they lift the share price to reflect accurately the "true value" as shown in the underlying assets.

The other listed investments are Evergreen Forests and the two forestry funds, Nuhaka and Opio.

Evergreen stepped up its harvesting volumes in the six months ended December 31, but the company's future profitability, lies in its forest holdings. The interim report said the group had a net forest stocked area of 19,303ha under its ownership and another 1843ha over which it had forestry rights.

Evergreen's harvest profile is expected to rise rapidly in the current year and in the following two years, before levelling out in the period to 2010.

The company's share price still lags well behind net asset value, but that is likely to continue until profitability reaches a level commensurate with the capital structure.

Forestry companies' share price growth - or lack of it - will depend on the extent to which equity investors see opportunities in the "old" economy, as opposed to the "new" world of technology-oriented businesses.

FORESTRY SHARE PERFORMANCE

Company	Price 10.4.00 (c)	% change since 6.8.99	1999/00 High (c)	1999/00 Low (c)	% change on 1999/00 low
Carter Holt Harvey	193	-22.8	273	158	+22.1
Evergreen	47	-6.0	55	40.7	+15.5
Fletcher Forests	76	-27.6	119	51	+19.0
Fletcher Paper	229	+61.3	234	105	+118.1
Nuhaka	1335	+13.1	1500	980	+27.6
Opio	49	-10.9	65	45	+8.9
NZSE 40 capital index	2154.27	-1.6	2292.84	1956.46	+10.1

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