Carter Holt Harvey's next big thing

By Shoeshine

Friday 25th June 2004

Investors have long had an on-again, off-again relationship with Carter Holt Harvey. Judging by the share price graph the affair, rekindled around June last year, has cooled off a little in the last three months.

To Shoeshine's mind this is a little ironic and possibly a result of the flood of divestment-grade initial public offerings that have come on stream.

Analysts seem to agree. First New Zealand Capital, Goldman Sachs JB Were, Forsyth Barr and ABN Amro have all warmed to the stock in recent reports.

And even though the shares are off their $2.34 April peak, they are still at a level not seen since early 2000.

Given Carter's history as a range-trading stock buy when prices for its commodity products are low, sell out again when they're high it's possible some investors have been taking profits and tightening their belts for the next round of global hard times in Carter's markets.

They may be wrong.

The sale of the tissues business, this week's $214 million investment in China and the possible sale of some forest assets all suggest chief executive Peter Springford has a game plan that could shift the company fundamentally away from the commodities price-reliant, economic value-destroying model of old.

One thing to note about the China deal is it wasn't done as a result of Carter gaining a huge swagbag from the tissues sale and looking for somewhere to park it.

According to Springford, Carter had been doing due diligence for 12 months that is, since last June. The review of the tissues division wasn't announced until November.

Springford said earlier this year that Asian acquisitions were on the agenda as the company sought to get closer to its customers, so it's possible more deals are in the pipeline.

The company has plenty of capacity to do them. Following the tissues sale, the $480 million capital return and the China acquisition, net debt to total capitalisation will be a very modest 10%.

Attention is now concentrated on three things: the global environment for Carter's products, the quality and logic of any further acquisitions, and any sale of local forests.

On the pricing front things are definitely looking up. Producers of NBSK (northern bleached softwood kraft pulp) recently announced rises to $US680 a tonne, the highest level since January 2001.

The price of radiata pulp into Asia has reached $US600 a tonne, up from the $US466 average during 2003.

Prices for MDF (medium density fibreboard) have been moving up too. The China acquisition extends Carter's 630,000 cubic metre capacity in Australia and New Zealand by 350,000 cubic metres in a market where MDF demand has been growing at 35% a year.

Prices for logs, particleboard and lumber have been less exciting but are expected to remain stable.

So the next big announcement is likely to be the decision on sales of the 330,000ha forest estate, expected in the last quarter of this year.

The range of possibilities here and the amount of money Carter might realise are so broad that practically nothing can be excluded.

Analysts are agreed, however, that to ensure continuous supply to the pulp division and keep some bargaining power, the Kinleith forests comprising 130,000ha or 40% of the total will have to be retained.

It's also a pretty good bet Carter will keep the nearby Bay of Plenty estate, comprising about 9%.

The rationale for hanging on to the remaining half of the estate spread around Northland, Auckland, Coromandel, Nelson and Canterbury is less clear-cut so it's possible all of these will go.

Of the "non-core" forests, the 28,000ha Nelson forest, which Carter failed to sell to Weyerhaeuser in 1999 when the Commerce Commission knocked it back, is arguably the most marketable as it's close to MDF mills and to Port Nelson and sits on about 75% freehold land.

But none of the others is a million miles away from a port and/or domestic processing facilities.

Assuming about half of the estate will be put up for sale, how much might this raise?

The problem with speculating along these lines, for amateurs such as Shoeshine at least, is that past transactions are of almost no use.

Forest sale prices per hectare can vary by more than 100%. They depend mainly on location (for example, proximity to the nearest port), terrain, density, individual forest characteristics (such as whether they've been pruned to produce clearwood) and infrastructure (such as good road access).

Log prices and exchange rates also influence value and can swing around considerably. So there's no good pointing out Tenon's 8940ha Tahorakuri and Tauhara forests went to UBS Timber Investors in March last year for $8700 a hectare; that Tahorakuri was offered to Rubicon in June 2002 for $11,032 a hectare; or that 40,000ha of Tenon's estates were sold in February this year for $14,000 a hectare.

What is worth pointing out is that sales to a Timo (timber investment management organisation) or a trade buyer aren't Carter's only options. It could also sell land on the peripheries of its estates around Kinleith for dairy conversion and around Nelson for lifestyle blocks, for instance.

By way of comparison, good quality North Island dairy land, including dairy shares but not taking account of the cost of conversion from cut-over forests, is going for about $35,000 a hectare, with poorer stuff fetching $20,000.

Taking a wild stab in the dark which is what Shoeshine will be getting one night if he's not careful he estimates Carter could raise at least $500 million from forest and land sales without compromising pulp log supply security.

That would wipe out its debt and provide a big pot for shareholder returns or for more acquisitions.

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