Watching trees grow as capital gain slows down

By Peter V O'Brien

Friday 12th April 2002

FORESTRY COMPANIES' SHARE PRICE PERFORMANCE

Company	Price 5.4.02	Price 6.4.01	% Change 4.4.02	2001/02 high	2001/02 low

Carter Holt	$1.90	$1.81	+5	$2.04	$1.40
Evergreen	.59	.52	+13.5	.60	.45
Fletcher Forests	.26	.32	-18.7	.36	.21
Nuhaka	$9.00	$10.25	-12.2	$12.10	$8.10
Opio	.52	.50	+4	.60	.41
NZSE40 capital index	2076	2048	+1.4	2144	1790

Investors looking for solid capital gain in forestry and forest products stocks could be waiting a long time, on the price evidence of the past three years.

Recent developments in companies such as Carter Holt Harvey and could have a marginal effect but are unlikely to cause major movements.

Prices for the five listed forestry/forest products groups are in the table and compared with the situation a year ago.

Modest percentage gains for Carter Holt Harvey, Evergreen Forests and Opio Forestry Fund offset declines in Fletcher Forests and Nuhaka Farm Forestry Fund. The longer-term trend was less favourable.

Share prices last week were lower than in August 1999, excluding Evergreen. Prices in August, 1999 were: CHH $2.50, Fletcher Forests $1.05, Nuhaka $11.80, Opio 55c and Evergreen 50c.

Weak international commodity prices affected company profitability and related share prices.

Latest financial reports suggested a recent improvement in commodity prices for logs and sawn timber. Pulp and paper demand was expected to remain subdued with consequent effects on financial returns.

Better log prices persuaded Nuhaka to resume harvesting in February. Fund manager Perpetual Trust said an improvement in log prices, particularly for unpruned timber, led to the decision.

Evergreen's report for the six months ended December 31 said a $3.54 million profit (2000, $3.53 million) was a good result, given log market volatility and the impact of wet weather on harvest levels.

Chief executive Mark Bogle said trading conditions were favourable, "particularly in Asia, evidenced by higher export volumes, improved pricing and the emergence of China and India as exciting future markets for New Zealand plantation grown products."

Fletcher Forests' half-year report and a statement from CHH for the nine months ended December confirmed the improvement in Asia.

CHH said export log prices should show some improvement in the first half of 2002/03 due to high economic growth levels being experienced in China and Korea.

Fletcher Forests' report said construction activity was continuing to strengthen in Korea, where log prices had firmed in recent months and housing and consumer confidence statistics were encouraging.

The developing markets of China and India also showed "positive momentum" in both volume and prices.

Fletcher Forests has reached agreement with the receivers of the Central North Island Forest Partnership to buy the partnership assets. Full details of Fletcher Forests' agreement with the receivers, including conditions, have yet to be released.

Shareholders will be particularly interested in the financing arrangements. They will want a better experience with the operation than occurred under the Fletcher-managed partnership.

Carter Holt Harvey shareholders should be interested in recent developments involving the company's Kinleith pulp and paper operation.

Kinleith is more than "just another plant." It is one of the country's biggest standalone industrial complexes and was the major operation of NZ Forest Products, once New Zealand's top company.

CHH said on March 27 that it would begin "consultation" to reorganise and reduce the workforce at Kinleith and start negotiations on a new collective employment contract.

The consultation could be interesting, because the proposed structure would see 369 people directly employed at Kinleith, with a maintenance contractor creating another 190 positions. Kinleith currently employs 722 people.

A figure of 369 people was specific and unusually exact. It suggested considerable work went into the proposed restructuring.

There was nothing about it in the company's half-year report released on October 27 or in the January 22 announcement of results for the nine months ended December, unless something could be read into a broad comment that "tough decisions will continue to be made to ensure that every business is capable of earning its cost of capital."

Shareholders and the market heard on March 27 that Kinleith had not paid its way in recent years.

Chief executive Chris Liddell said the average return on funds invested at Kinleith over the past five years had been "just" 5%.

That was not enough to justify reinvestment and created concerns about growth and long-term sustainability.

A "Kinleith media backgrounder" said recent renewal initiatives at Kinleith included:

A more than $300 million modernisation project (1996-99) to increase output 30% and create a better range and quality of products;

the value creation project reviewed and questioned every facet of the value chain, from the forest to the customers' warehouses.

The company invested more than $300 million over four years ending in 1999 but found the average return on investment over five years (from 1997) was "just" 5%.

Poor financial performances do not suddenly arise in an investment when the five-year average return is 5%.

Constant monitoring of financial performance is the job of senior management and the directors.

Poor returns from Kinleith should have been addressed long ago.

CHH senior management and, presumably, the board must have known in late January that Kinleith was to be reorganised, been aware of the financial returns and considered a large number of redundancies, even if the specific 369 people to be retained in direct employment were still under consideration.

The first lot of formal information was released on March 27. It seems some CHH head office senior executives and directors should accompany the many Kinleith employees to be sent down the road, given the apparent background to the current situation.

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