Damaged CHH tips speedy recovery

Peter Springford

Carter Holt Harvey has predicted a quick recovery from injuries inflicted by a sudden and unexpected downturn in the important Australian housing market.

Chief executive Peter Springford reckons the forest products giant can hit market expectations of a slight rise in annual operating profits from $295 million to around $300 million.

This forecast is before the contributions from the central North Island mills it is acquiring from rival Tenon for $165 million. It is also after yesterday disclosing the Australian downturn and the strong dollar had knocked first-quarter operating profits from $77 million to $49 million.

The company is counting on a programme of cost reductions, including a cull of staff at its head office, productivity improvements and a less sharp fall-off in the Australian market, where it generates 40 per cent of its sales.

"We are expecting weak demand in Australia, but not as dramatic as in the first quarter. The second half of the year will be somewhat stronger," Springford said.

Analysts were surprised by his confidence.

"I think the [forecast] is a big ask, but we have to take some notice about what they are saying" said one.

Many were also disappointed by the bottom-line result. Net profits for the quarter fell from $111 million to $90 million. This was after a $97 million gain in the value of its forest assets, and a $31 million gain on foreign exchange contracts.

CHH's shares fell 10c to $1.80, a two-and-a-half year low and still well short of the $2 just before the March warning.

The wood products division has borne the brunt of the slowdown, which saw Australian home building approvals fall by 3.4 per cent fall in February to 8543 and follows hikes in interest rates.

The division's operating profits for the quarter, traditionally the weakest for the year, fell from $18 million to just $2 million, even though sales only fell from $427 million to $423 million.

To cope, it brought forward maintenance at its MDF and flooring mills in Australia and extended closures at New Zealand mills. It has also run a rule over all its mills and cut staff.

CHH's earnings forecasts are based on housing starts in Australia only falling from 166,000 last year to about 150,000 this year. It is counting on New Zealand housing starts falling only from 31,500 to around 27,000.

"The company remains strongly focused on delivering productivity and efficiency improvements across its wood-products operations and continues to have confidence in the Australian market long term," Springford said.

CHH commercial director Maree Webster said if the dollar fell from its present level above 70USc to its long-run trend of around 58USc, it could see a $100 million gain in earnings from cost cuts and productivity improvements.

Operating profits at its forestry arm jumped from $14 million to $23 million, helped by an $11 million gain from land sales.

CHH is in the middle of selling just under a third of its 324,000-hectare forest estate and expects bids during the second quarter with an update delivered to the market in July.

Pulp and paper earnings fell from $33 million to $14 million, with a two-week maintenance shutdown at the company's Tasman pulp mill boosting costs by $7 million.

- additional reporting agencies