'Wall of Wood' holds Fletcher Forests back

By Nick Stride

Friday 1st March 2002

Fletcher Challenge Forests claimed a "strong recovery" for the December half-year but its rhetoric failed to fire the market.

After trailing along at 23-24c since the New Year the share price lifted to 27c before the profit announcement but has since subsided to 25c.

Along with Carter Holt Harvey and Evergreen Forests FCF noted log prices had recovered somewhat from the lows of last year.

But earnings before interest and tax (ebit) of $24 million, while treble the $8 million of the six months to June 2001, were up only $1 million on the first half a year ago.

They also represented a niggardly return of 1.43% on the $1.67 billion invested in the business.

UBS Warburg forestry analyst Frances Loo said forest products prices were up off their cyclical lows but investors still had to gauge the likely longer-term effect of the fabled "Wall of Wood."

"What's not clear is whether, as the additional wood fibres New Zealand has come on stream, that will lead to some further [price] erosion over the next several years," Ms Loo said.

Ebit in the latest period was boosted to $41 million by the inclusion of a $17 million, or 2%, rise in the valuation of FCF's forest estate.

Under a new accounting policy the company's earnings are adjusted twice yearly for the estate's gain or loss in value. The estate was worth $1.14 billion on December 31.

FCF said its harvest volume was still outstripped by the forests' biological growth. In the latest period the increase in value due to biological growth was offset partly by slightly lower 12-quarter index prices.

The expected write-off of FCF's $349 million of second-ranking loans to the Central North Island Forest Partnership took the bottom line to a loss of $302 million.

There was no news on the partnership's receivership sale. At press time talk around the market was that the banks would call off the sale process and that the estate would continue under FCF management while the banks waited for a sustained lift in wood products prices to lift its value.

A consortium of about 12 local and offshore banks led by BNZ are owed $US640 million ($1.53 billion).

Analysts said that figure plus receiver Ferrier Hodgson's fees were likely to be the "reserve" price below which the banks would not sell.

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