Dangers in lone-standing Fletcher Forests

By GEOFF SENESCALL

Fletcher Forests shareholders can expect $28 million to be wiped off net earnings when it becomes a standalone operation in March.

This figure was highlighted in seven pages of risks outlined in a prospectus for Forests' $427 million rights issue, which kicked off yesterday.

The profit hit relates to parent company Fletcher Challenge carrying the value of its forestry estate at $487 million more than what it is in Forests' accounts.

But the company stressed that this was a non-cash item and therefore had no impact on the cash flows of the group.

Furthermore, the prospectus indicates that Forests might look to write down the value of its estate.

"The value of the forest estate is dependent on market prices and key operating assumptions over a long timeframe," the prospectus says. "Fletcher Forests manages its harvest scheduling with the objective of achieving the maximum economic return from a rotation, and currently uses an average rotation length of approximately 27 years for Radiata pine and 37 years for Douglas Fir.

"Any change in assumptions regarding future market prices, key operating factors or cost of capital could have a significant impact on the accounting carrying value of the forest estate and could result in value impairment, which would be recognised by writing down the book value of the forest estate."

The prospectus also points out that the carrying value of its estate is higher than that of analysts as a further pointer to a possible write-down.

The average broker valuation for Fletcher Forests is 85c a share whereas the company's reported net asset backing value was 169c a share as at June.

In the Fletcher Challenge group the net asset backing value of Forests is 226c a share.

Another factor raised in the review of risks is that cost of interest for the standalone vehicle will increase by up to 2 per cent.

Until now, Forests has been sheltered by Fletcher Challenge and the other divisional assets.

On its own, Forests is expected to have a lower credit rating but the effects will be watered down by cash raised from the rights issue.

The interest-bearing debt held within Forests is $771 million. That will reduce to $343 million after the rights issue is completed and asset sales are made.

The annual interest charge is only expected to increase by around $7 million. The change in credit rating will not effect Forests' share of the debt held within the Central North Island Forestry Partnership.