Fletcher makes a clean break

By CHRIS DANIELS forestry writer

Fletcher Challenge Forests has finally shucked the legacy of its failed Central North Island Forest Partnership venture after announcing a $249 million full-year loss.

The result was dominated by the write-off of $324 million in debt owed by the CNIFP, now in receivership.

Without that handicap, New Zealand's second largest forestry company would have made an after-tax profit of $75 million, compared with a $53 million loss last year.

Revenue was $664 million, up from $634 million last year.

Yesterday's results, for the year to the end of June, are the last to include aspects of Fletcher's failed joint venture with the Chinese investment company Citic, with all debt and equity once tied up in the CNIFP now written off.

Fletcher shareholders last week rejected a scheme to re-incarnate the partnership, this time with Citic taking a 35 per cent stake in Fletcher Forests.

It is also the last time that Fletcher accounts will include legacies from the old days of the Fletcher Challenge empire.

The accounts show a big jump in earnings before interest and tax to $93 million in the second half of the year, up from $43 million in the first six months.

First NZ Capital analyst Andrew Mortimer said the results were better than some had expected, particularly the performance in North America. The Consumer Solutions division increased its operating revenue to $194 million from $145 million the year before.

The news was not so good for the Japan Engineered Wood Products division, however. It has been losing money for the past few years and will be shut down.

No dividend will be paid this year but Fletcher has hinted at the possibility of a share buyback or some other "capital management options" given its now "comfortable debt level and increased financial flexibility".

The company's chief executive, Terry McFadgen, said the board would look at the use of capital.

"In that basket we will be looking at further potential add-value expansions.

"At the same time we must look at those and weigh them against other uses of that capital," he said.

"And one of those uses is some form of distribution."

Between $50 million and $100 million would become available for the board to allocate to the preferred option.

When asked what shareholders could expect from the company, chairman Sir Dryden Spring spoke of a "significant upside".

"The net asset backing of the company is about 41c per share. That will rise quite rapidly as the forests mature. We are getting more and more saleable wood."

Shares in the company were clearly trading at a very significant discount to market, Sir Dryden said, in part because of uncertainty over the CNIFP.

Fletcher Forests, as a new company, now needed to show a record of good performance before the discount-to-asset-backing was removed. The underlying performance of the company had not been bad, he said, with earnings a little under 10 per cent on capital employed.

Yesterday's results showed earnings from Fletcher's North American operations grew by 136 per cent in the past year. Prices and volumes for log exports increased during the year, particularly in Asia. Net debt for the whole company dropped by $76 million to $247 million.

Company chief financial officer John Dell said the accounts for the year to June were the last for Fletcher that would include details from the old Fletcher Challenge (FCL).

"Next year we'll be able to focus on the true operating results," he said. "We now have a very transparent balance sheet, we have a forest valuation at market, we don't have any of the legacy FCL issues lying around - so it's actually a very good set of financial statements for people to look at."

Pruning trees used to be capitalised, but were now accounted for as an expense.

Fletcher plans to harvest just under 2 million cubic metres of wood this year, a 20 per cent increase in wood cut during the past 12 months.

"In the absence of any unforseen material adverse event we would expect to deliver a further significant improvement in operating results, prior to any currency impacts, in 2003," Sir Dryden said.

Fletcher shareholders will be asked at the annual meeting in November to approve a share consolidation.

The New York Stock Exchange told the company in May that it breached listing rules this year when the price of its American Depository Receipts (ADRs) did not stay above the US$1 ($2.14) minimum over a consecutive 30-day period.

The exact ratio of the share consolidation has not been decided, said company secretary Paul Gillard, although the Fletcher board has said the current 10-to-1 ratio of Fletcher shares to ADRs will continue.

Fletcher currently has 2.8 billion shares issued. Gillard said the NYSE would allow the ADRs to trade below US$1 while the consolidation was arranged.