Forests' 'annus horribilis' brings unwanted claim to fame

By CHRIS DANIELS forestry writer

The combination of a failed partnership with the Chinese Government, a new method of valuing trees and the cost of separating from a mother company has earned Fletcher Challenge Forests a place in the corporate hall of fame - for all the wrong reasons.

It has announced one of New Zealand's largest corporate losses - $749 million for the year to July.

This giant loss stems mainly from a $533 million writedown of Fletcher's share of the ill-fated Central North Island Forestry Partnership (CNIFP), which went into receivership in February.

Fletcher's method of valuing its forests has now changed, with the company saying the new method of using market values more accurately reflects the value of the trees.

This change has, however, led to a $174 million writedown of the value of the forest estate. Another unusual item to hit Fletcher Forests was the $55 million cost of separating from its former parent, Fletcher Challenge.

Company chairman Sir Dryden Spring said the first annual results for Fletcher Challenge Forests as a standalone company represented the collapse in value and later receivership of the Central North Island partnership.

Allaying fears of an impending "wall of wood" about to flood the market, Sir Dryden said increasing wood volumes were not a problem. He was confident it could all be sold.

The company is predicting a $30 million profit next year.

Even without a jump in wood prices, Fletcher's performance could be lifted substantially because of a natural increase in the amount of wood available, said Sir Dryden.

"With the turmoil of the process of separation, financial restructuring and the situation of the CNIFP now clearly to one side, it is very important to refocus on the substantive competitive strengths of Fletcher Challenge Forests as a global forestry and wood-processing entity."

Tough world trading conditions and low wood prices were apparent in Fletcher's operating results, which showed revenue up 4 per cent to $648 million, but earnings before interest and tax fell dramatically to only $3 million - down from $28 million the year before.

Chief executive Terry McFadgen insisted the outlook for the company was positive. He said the Korean market was improving and the Australian timber market - which suffered a huge post-GST housing slump - was also about to grow.

Mr McFadgen emphasised the potential for better cooperation between New Zealand wood producers.

He said an arrangement with Carter Holt Harvey and a consortium of smaller players to export wood to India was working well.

He wanted to see better marketing of New Zealand radiata around the world, in countries such as the Philippines and China.

Talking up Fletcher's share price, chief financial officer John Dell said net debt had been substantially reduced by last year's recapitalisation - down from $771 million to $323 million. The market value of Fletcher's forests was now $1.12 billion, which, along with other assets, gave asset backing a share of 50 cents.

Fletcher Forest shares closed yesterday at 32 cents. They have ranged this year between 28 cents and 36 cents.

Credit Suisse First Boston analyst Andrew Mortimer agreed that Fletcher Forests was undervalued.

"At an operating level there was nothing unexpected about the result ... There are some positive signs in some of the overseas markets."