TENON

[Unicorn]

Value ...
62.5c soon
+51.7c later (1)
+24.0c residual (2)
138.2c Total (approximate)

Not what I call great value.

(1) up to 57.5c after Tarawera sold, assuming $165M realised. Actual may be less, and payment probably 9+ months out. Therefore current value is probably less than 57.5c (say 10% discount).

(2) 46M forecast EBITDA, 2004. Do we believe them? Do we believe anyone who uses EBITDA? If EBITDA is $46M, how much less will actual Earnings be? Payout has already been much delayed, giving artificially favourable Interest situation. CHH and Pension funds are reducing cutting for next few years, which should increase log prices. Freight rates are not looking good. The consumer market globally does not look very robust to me. Logic says that the middle men face a squeeze ... just when Tenon become solely middle men! Say $22M (from GS projection) viable ongoing earnings = 4cps. A multiple of 6 may be appropriate for a company that has the record this one does ... so 24cps residual value. One offs like the $9M currency gain may give a temporary lift, as reported profit is likely to exceed on going profit.

[spagnum]

I have just sent an email to the Tenon Investor Relations team regarding the Record Date but wonder whether there is a forum member that can clarify a point for me. Does the Record Date just cover the first capital distribution or does it cover both of the planned distributions?

Spagnum [?]

[Unicorn]

The Record Date (26/03/04) applies to the first (62.6cps) distribution.

The date and amount of the second distribution have yet to be set.

[Taijon]

This is a very interesting point. As I understand the situation, if the Tarawera forest had been sold at the same time as those forests already sold, shareholders were going to get 120 cents per share.

However as Tarawera hasn't been sold the return is only 62.5 cents per share and 50% of the shares will be cancelled at the same time.

I expect a new date will apply for a return of capital in the event Tarawera is sold. However the return should be twice as much per share as there will only be half the number of shares.

Do others see it like me?

[spagnum]

Taijon,

In the paperwork they've sent out, they refer to the 2nd capital distribution as being x cents per existing share ie, per share before the share cancellation.

Spagnum

[Unicorn]

The up to 120c was always proposed to be in two separate distributions. If the original Tarawera sale had gone as planned the first capital return was to be 93.75c, and the second up to 26.25c. With the Tarawera sales falling through the first return was reduced to 62.5c. The first capital return was approved by shareholders on 20 February.

Do not overlook the conditions on the second return ... "If all the forestry rights and forestry leases are able to be transferred (and the Tarawera Forestry Right is transferred to Kiwi) and there is no deterioration in trading conditions, the company expects to be able to return up to 120c per existing share in total to shareholders. The Board proposes to put to shareholders the further approvals required for the second capital return in the second half of calendar 2004."

The Special Meeting on 20 February only voted on the first capital return. A further vote will be held once the board is in a position to propose conditions for the second capital return. Everything thus far suggested for the second capital return has been carefully qualified ... lots of "if" and "up to".

[Prophet]

Unicorm agree with your valuation up to the PE of the new company. I note Tenon themselves indicate a PE of 6-7 but is that realistic for a manufacturer? I would have thought that anything up to double that wouldn't been too unreasonable for the current market and I see that Macquaries have even questioned the low PE c.f like companies.

I guess the market will decide in the end. I'm backing a higher PE, despite their track record to date, as I see merit in the new business model.

[Unicorn]

Prophet, I agree that a pe of 6-7 will eventually be seen as too low. But at this stage it is not unreasonable given the unreliability of estimates of on going earnings. The company has yet to establish an earnings record in the environment they will be operating in. With earnings forecast at about 4% of sales, small changes in prices or costs may have a large impact on the bottom line.

Some questions ..
1. What will happen to exchange rates in key markets (and how well will company handle exchange rate fluctuations)?
2. What prices will be available for finished product in key markets in future years (US debt levels, housing price bubble, Chinese business practices are big issues)?
3. How much will the more rationalised forest ownership structures force up raw material prices (we have already seen cutting will be reduced)?
4. Will freight rates be able to be held at acceptable levels (markets are far away, shipping over-capacity has been dealt with, oil prices are rising)?
5. What impact, especially short term, will come from competing international supplier?

[ari]

Only 7 days to go Just curious to hear what other plan to do with their payout....mines going in my builders pocket...but I'm certainly going to open another Te Motu '94....

[ari]

Just thought I would bring this back to original heading instead of some guys going off on different sub headings for some reason.....

Tenon's future status comes under scrutiny
05 April 2004
By RICHARD INDER

Tenon's future as an independent company was coming under scrutiny at the weekend.


Observers said the revival of a deal to sell its 20,700-hectare Tarawera forest was set to remove the major impediments to a takeover. The $165 million deal resolved a bitter dispute with rival Carter Holt Harvey and paper giant Norske Skog, reducing uncertainty over Tenon's value.

Carter Holt and Norske Skog said Tenon's decision to sell the forest would breach an agreement to supply wood to their mills at Kawerau.

A takeover after the Tarawera deal, which is due to be completed in the middle of the year, was also less risky because Tenon would have a tighter focus on wood processing and distribution, analysts said.

At the same time, they said Tenon's ordinary and preference shares, at $1.72 and $1.73 apiece, were cheap - reflecting questions over the management team led by chief executive John Dell. "The industry is consolidating," one observer said.

Tenon has projected that trading profits at the wood processing operations will increase from $45 million this year to $57 million next year.

It also says it will increase sales from $500 million this year to more than $1 billion in five years. Few observers believe it will hit those targets.

"We think the targets are a bit aggressive," one analyst said.

The analyst, like his peers, has seen Tenon make promises before and not deliver. The near collapse in January of the deal to sell the forest, which threw into jeopardy a promised $669 million capital return, was the most recent of several slip-ups.

Carter Holt Harvey has been tipped as the most likely bidder.

Carter Holt is thought to be keen to expand its wood processing operations. But hurdles such as the Resource Management Act and other costs may make growth by acquisition more attractive.

Carter Holt is also flush with cash. It has just sold its tissue arm, maker of Purex toilet paper and Treasures nappies, to Sweden's Svenska Cellulosa for $1 billion - $200 million more than some observers expected.

However, a takeover will not be plain sailing.

Carter Holt, focused mainly on lumber, pulp and brown paper, is unlikely to be interested in Tenon's North American wood mouldings arm, which is outside those core business sectors.

Also, investment group Rubicon holds almost 20 per cent stake in Tenon, which gives it the power to block any takeover.