Timber giant feels the bite

By PAULA OLIVER

A massive slump in the Australasian construction market has hit timber giant Carter Holt Harvey harder than many analysts expected.

Revealing third-quarter earnings yesterday that were well down on the previous two quarters, Carter Holt chief executive Chris Liddell said the building decline had been more sudden and deeper than expected.

Hardest hit was the Wood Products division, where timber sales dived as a result of a 43 per cent drop in Australian home-dwelling consents.

Locally, the market is also weak.

Carter Holt had looked to be firmly on the comeback trail last year, when it posted a series of record results amid a building boom and a generally buoyant industry.

But yesterday's result removed that gloss.

Overall net earnings for the third quarter to December 31 were $42 million - less than half of the September quarter's $86 million, and even further below June's $90 million.

Much of the blame was laid on the unprecedented slowdown in Australasian building markets. Across the Tasman, the slump started with the introduction of GST in July, and deepened with the end of the Olympics.

Carter Holt is also feeling the effects of a slackening in global demand for pulp, which has forced it to shut down the revamped Kinleith mill today for six days.

Many other international companies are also taking market-related downtime in an effort to avoid huge stockpiles.

"In the face of it, we've done all we can possibly do that's under our control," Mr Liddell said.

"But clearly, halving the demand is a severe contraction to deal with."

Despite the disappointing quarter, Carter Holt's cumulative earnings for the nine months to December 31, at $218 million, are still up 50 per cent on the previous year's $145 million.

But one analyst said that advantage could be lost over the next quarter, because the immediate outlook for most of Carter's divisions was not good.

"The result ... shows that any momentum they had has stopped," said Dennis Lee, of ABN Amro. "Looking forward, the pressure will be on earnings, and they could have to ride through another two quarters before it changes."

While log prices held reasonably steady, the Forests division saw total sales fall to 1.78 million tonnes - down 13 per cent on the previous quarter.

Wood Products returned earnings before interest and tax of just $6 million - a fraction of the previous quarter's $25 million.

Panels has been hit by the flow-through effect of the building slump, which generally came two or three months after timber sales fell. But while local timber sales volumes were up, much of it came from an increase in sales of lower-grade packaging timber.

Pulp and Paper recorded its first drop in earnings since June of 1999, falling 13 per cent.

A light on the horizon was a good performance from the tissue division and good operational results from the mills.

Mr Liddell said the outlook for Carter Holt's markets was difficult.

"There are signs in the construction market in Australia and New Zealand that things are picking up, and business confidence is higher," he said.

"My major concern at the moment would be the global situation - you don't have to be overseas for long to see that people are concerned about the outlook."

Further complicating the situation was the adjustment taking place in the US economy, he said.

Asian markets, while not being disaster zones, were also difficult to pick.

Credit Suisse First Boston analyst Andrew Mortimer said the result was slightly worse than expected, but Carter Holt remained a cheap buy.

Other analysts said that the Wood Products division had probably reached rock bottom, and would now go up.

"It's hard, because Carter is such a mixture of divisions," one analyst said.

"Around the world, the trend is for companies to consolidate as either pulp or paper or forestry companies - but Carters goes against that, and it makes it difficult to get investors interested."

Carter Holt Harvey shares closed down 3c at $1.59.