Earnings 'not good enough'

By PAM GRAHAM

Fletcher Challenge Forests had better numbers than last year and black ink instead of red on the bottom line of its interim report card released yesterday.

But the comments section had a "not good enough" regarding the company's return on assets from its outgoing chief executive Terry McFadgen.

The nation's second-largest forest owner turned last year's $302 million first-half loss after writeoffs on the Central North Island Forest Partnership into a $4 million profit for the six months to December 31.

Its operating earnings rose 68 per cent to $47 million on revenue 11 per cent up at $359 million, driven by a 55 per cent rise in operating earnings to $17 million from its North American distribution business.

The story was similar to that told by rival Carter Holt Harvey.

McFadgen said the return on assets from operating earnings at some 6.6 per cent was less than the company's target of 10 per cent.

"It is not good enough," he said.

Carter Holt's slightly different calculation gave it a 6.9 per cent return, which was less than its cost of capital of 11 per cent.

Fletcher Forests is concentrating on its processing, marketing and distribution businesses that have higher returns, as well as cutting costs and lobbying for the "intelligent and coordinated" selling of logs.

After it failed in its bid last year to buy the Central North Island Forest Partnership back from receivership, the company said it would instead start selling forests and then announced the sale of cutting rights to 8 per cent of its estate to UBS Timber Investors, releasing $140 million that it hopes to return to shareholders.

McFadgen said the company was in discussions with other parties about "forest matters" but "we are not poised with the pen".

The sale strategy addressed an undervaluation of the company's assets by the share market and would be pursued as long as that existed.

The price UBS paid implied the company's assets were worth the equivalent of $1.85 a share when the shares were then trading at $1.

"Should that value gap be eliminated there is clearly no case, or tension, for selling cutting rights," he said.

The CNIFP is selling the Waipa sawmill and McFadgen said Fletcher Forests had declared an interest.

"That is proceeding as a discrete activity and will come to a conclusion in some time in the next couple of months."

The company had reduced its debt and had new loan facilities that would save it $3-4 million a year.

Looking ahead, he said positives were solid demand in the US - people stayed home and did DIY in uncertain times - and a strong housing market in New Zealand.

But the rising New Zealand dollar was a negative and export log markets were a hard call.

"All in all we anticipate lower operating earnings in the second half relative to the first."

McFadgen said the annual profit before hedging, forests revaluations and unusual items would be similar to last year's $58 million.