Carter's forest sale earns a guarded tick

Peter Springford

Carter Holt Harvey's sale of almost 95,000ha of its forest estate for $441 million has won cautious support from investors.

The deal, struck late Friday evening for $27 million over book value, was ahead of some market expectations.

"It has to be positive," said one fund manager yesterday. "People were expecting a discount to book value."

Analysts said the deal would help establish the value of the entire company, which may sold now controlling shareholder, forest products giant International Paper has said it would review its interest.

Carter Holt shares could benefit from the positive sentiment this morning. They closed up 1c at $2.38 on Friday, or 23 per cent higher than they were when IP disclosed its plans at the end of June.

Carter Holt is selling a third of its 330,000ha forest estate because it has struggled to generate a return on the capital invested.

In year to December 2003 it wrote down the value of its forests by $900 million to around $2 billion. Last year said it would sell the forests not needed to supply its own mills.

Friday's deal was with a consortium comprising United States forest company Rayonier, fund manger RREEF and some private buyers.

Carter Holt chief executive Peter Springford said allowing for about $38 million in tax and about $18 million in transaction costs, the transaction would return around $385 million in net proceeds.

The Carter Holt board had yet to decide what to do with this cash, but it was unlikely to distribute to investors during the IP review, Springford said last night.

The company will discuss the deal with analysts this morning and on Thursday it will disclose second- quarter earnings. On both occasions IP's review of its strategic stake will be topmost in investors' minds.

Australia's Gunns, Amcor and unlisted Visy are possible candidates for parts of Carter Holt, while Boston-based Forest Capital Partners LLC, Boise Cascade, and Weyerhaeuser Co are expected to show an interest.

Rickey Ward at Tyndall Asset Management said Carter Holt was attracting a particular type of investor who was willing to bet that the potential impact of the breakup or takeover of the company would be greater than its underlying earnings.

Analysts expect the "challenging" trading conditions of the first quarter to have again featured in the second.

The company will however still enjoy the beneficial impact of a forward cover programme for its foreign exchange exposure..

Goldman Sachs JBWere analyst Doug Smaill said he expected Carter Holt's operating profit to come to around $54 million, up from $49 million in the first quarter, and net earnings of around $30 million for the quarter.

"This is the last year of very large cover, so there will be plenty of foreign exchange gains in this result," Smaill said.

Operating earnings were $126 million in the first half to June 30, 2004.

Smaill expected earnings from Carter Holt's forest division to be flat against the previous quarter, a recovery in wood products, a decline in pulp and paper and an improvement in earnings from packaging.