Forest shares rising despite tough times for exporters

By PAM GRAHAM


A 6 1/2-year high in the New Zealand dollar is cutting exporters' returns and some commentators think it may choke the economy.

But it is not depressing the share price of the biggest forestry exporters.

Carter Holt Harvey's shares have risen 14 per cent in the past six months and Fletcher Challenge Forests' 17 per cent.

The most unloved of stock market sectors is back in favour with investors, even as it faces the toughest of trading conditions because companies are selling assets and returning money to shareholders.

Carter Holt's share price rise reflected hopes that the tissue business now on the market could sell for more than its $670 million book value, analysts said.

Some are predicting a 40c a share return of capital, though the company has indicated a range of options, including repaying debt and buying something else.

Fletcher Forests is selling all its forests, returning $1.20 a share to shareholders and turning into a much smaller wood processing and marketing company.

One fund manager who had regarded forestry stocks as "green death" said it could be a good time to buy if Fletcher Challenge was selling.

The harsh remark reflected disenchantment with the sector.

Carter Holt's share price has rarely been outside a band between $1.50 and $2 in the past four years. It rose 2c to $1.97 yesterday, up from $1.68 six months ago.

There is much speculation that Carter Holt will either sell its forests or drop them into a separate, unlisted vehicle owned directly by its shareholders. Chief executive Peter Springford has said it was not a good time to sell but also that a "go forward" strategy for forest ownership was being looked into.

Fletcher Forests argues it is selling its forests at a 50 per cent premium to what its share price had implied they were worth.

The reinventing of corporate form is a global trend as forestry companies focus on their cost of capital and returns on it.

Timberland has been sold to pension funds employing specialist timber management companies.

The funds have a low cost of capital, a long-term focus and can invest with little or no debt. The trend is taking forests into private ownership and off sharemarkets. The buyer of the Central North Island Forest Partnership was the endowment fund of Harvard University.

US company Rayonier put its timberland into a Real Estate Investment Trust from January 1. Rayonier's New Zealand assets were kept outside the new trust.

Such trusts are exempt from federal and state income taxes in the US because they distribute virtually all of their income to investors through dividends. The same tax advantages do not exist here.

Even so, listed forest owner Evergreen has signalled a review of its structure after failing to attract enough New Zealand investors in the 10 years it has been listed on the stock market.

Analysts said it all added up to corporate activity and that was what was driving share prices.

"There is excitement in and around Carter Holt because of the tissue sale and globally its peer group of stocks has also been rising," an analyst said.

There will, nevertheless, be a reminder of how tough business conditions are in the sector when Carter Holt reports its annual result on January 29. It has indicated a writedown of as much as $900 million in the value of its forests but some analysts argue this was a positive because overvaluation of the estate had been putting some institutional investors off.

Carter Holt is cutting costs to counter the impact of the high dollar and rising freight rates but the currency has risen more than it thought, implying more cost-cutting.

It has also cut its harvest to improve the age profile of its forests and to send a signal to markets that supply can reduce if prices are low.

Carter Holt expects to bring 80 per cent of its foreign cashflow this year back into New Zealand dollars at 48.67USc. By using financial instruments it has protected itself against the rise in the dollar to 68USc.

Analysts also argue that commodity prices will increase generally.