Money growing on trees?

There are a huge number of forestry projects vying for the attention of financial planners at the moment, as the end of the tax year approaches. But, as John Wilkinson found, some of these schemes have value beyond tax minimisation.

Investing in trees is not a new idea, but the latest schemes are showing a shift in focus.

To date, most managed investment schemes have been created for the woodchip market. However, this year has seen a change ? with a number of companies launching sawlog projects in various parts of Australia.

These projects still incorporate some chip production, taken from poorer quality trees, but the aim is to produce good-quality sawmill timber that can be used for housing construction. Other projects are growing timber for veneer and in, one case, growing timber for pallet manufacture.

All are aiming at the import replacement market, and are firm in the belief that logging of native forest cannot last forever. Some timber industry participants believe logging of native forests will end within five years due to environmentalists' pressure on both state and federal governments.

Integrated Tree Cropping (ITC) managing director Tony Jack says this pressure will extend overseas.

"The big production of logs in Indonesia and Malaysia from native forests will stop due to environmental pressure, so there has to be a build-up of replacement wood," he says.

"The solution is to grow new sawlog plantations in Australia quickly. And the plantations must be near existing saws mills to achieve the economics."

According to research by PIR Agribusiness Research, about 50 per cent of Australia domestic and export sawlog timber comes from plantations. However, this is expected to increase to 70 per cent in the next 15 years as plantation trees overtakes native forest and become the main source of sawlogs.

At present, Australia's plantation forests cover more than 1.2 million hectares, but the Federal Government's "Plantation 2020" program will see this increase to three million hectares.

PIR says there are up to 13.3 million hectares of land suitable for plantations.

But will the price for sawlog timber stand up if there is an explosion of timber planting?

According to a report for an investment scheme, Timber Australia, Alliance Resource Economics says the price for timber used in construction is about $492 per cubic metre. Timber used for fencing and pallet use will achieve a figure of about $300 per cubic metre.

Pinetec in Perth says veneer in New Zealand is achieving a figure of $189 per tonne, a sawlog in Australia is worth $112 a tonne and woodchips sell for between $30-40 a tonne.

PIR believes as native forest logging declines, and tree quality is maintained, the supply and demand of global markets remained matched. It also says there is a danger with the dumping of poor-quality timber destined for woodchipping on the sawlog market.

As woodchip prices remain static at about $30 a tonne this is always a danger, but forestry experts argue the trees grown for woodchip are structurally not suitable for sawlogs. Sawlog trees need to be pruned throughout their lives to produce a log with foliage at the top and a straight trunk. Woodchip logs are not pruned so often and have branches lower on the trunk, making them more difficult to mill.

The interest in alternative timber investment schemes has resulted in a number of schemes being promoted this year. Some are existing players such as ITC and Gunns. However a couple of new investment schemes have been launched, offering alternative choices for investors.

Timber Australia has been launched to provide sawlog timber from a plantation in Northern New South Wales.

The area being planted near Casino was a former cattle station that had been cleared of forest about 100 years ago.

The project plans to plant 1000 woodlots of one hectare. Each woodlot will have about 1600 seedlings made up of local gum species. These include Flooded Gum, Sydney Blue Gum, Dunn's White Gum and Spotted Gum. All grow on the plantation site and have the ability of providing quality timber for the sawmills.

The reason for selecting the northern New South Wales site was its good rainfall, 1200mm a year, and the cheap land. The area had been a strong dairy-farming region, but with deregulation of that industry, many farmers are selling up. The area is being touted as a future plantation region.

There are existing plantations and sawmills in the Casino/Lismore area, so the infrastructure for timber production is already in place.

One negative aspect that has been raised is the distance from a port for woodchip shipments, although supporters of the area argue that the bulk of the trees will go to sawn-timber or veneer production.

The cost of investing in this scheme is $5500 per woodlot. The plantation fee over five years is an additional $9800 and this covers managing the trees. The 15-year project is expected to return about $30,000 per woodlot, which would give an internal rate of return of 11.9 per cent.

Timber Australia chairman Peter Dunn says the project is different to woodchip schemes in a number of ways, one of which is the relationship between the adviser and project manager.

"My role as chairman is to put the investors first," he says. Dunn runs his own financial planning firm, Moneyplan Australia, and has put clients into many agribusiness investment schemes.

"The main point of difference between Timber Australia and other projects is that the investors are having their trees harvested and then milled to produce sawn timber," Dunn says. "The other sawlog or veneer projects are buying the standing trees, known as 'stumpage'."

This managed investment is also offering shares in Timber Australia to give investors a hands-on approach and the ability to share any profits from the finished product. The shares in Timber Australia are $100 a share and investors are required to subscribe for 10 shares per woodlot.

PIR has written a research report on the project and has given it an A post-tax rating and a B+ risk rating.

While the report is favourable to the project and notes that there seems to be sufficient funds in Timber Australia to allow the infrastructure of the project to be put in place, PIR does have some concern about the returns.

The research group notes the 15-year estimate to achieve the quality timber required for good returns could be optimistic and 18 to 20 years could be a more realistic timeframe. It also claims that projected returns from year six will probably be from trees that have been thinned from the plantation and therefore have negligible value.

In its report, PIR notes that the profits from the project will come from the harvesting and milling of the logs, and this area carries the main risk in the project.

"The Timber Australia project has been thoroughly planned and professionally developed," the report says. "The assumptions used to calculate the projected returns to investors are at the higher end of the achievable range, but can be supported by recent production results and industry pricing."

A second new player to the managed timber investment schemes is West Australian based Pinetec.

This scheme differs from most in that it is the end-user managing the scheme and is planting trees to guarantee a supply for its products ? pallets.

Pinetec processes 70,000 tonnes of logs a year at its Perth sawmills. It recovers 99 per cent of each log it processes, selling the sawdust and wood-chips to garden centres and selling some timber for the building industry as well.

It produces 10,000 pallets a week, which are mainly used by local manufacturers and the mining industry in Western Australia. The market for pallets is ongoing, as most are used for export and do not return to the exporter.

To meet this demand, Pinetec has started a plantations division which is mainly managing forests in the Esperance area. The managed investment will cover 100 hectares and Pinetec already has about 1600 hectares of plantations in Esperance.

Investors are being offered woodlots which will be planted with both pine and blue gums.

Pinetec managed investments manager Andrew Hull says the project will develop timber for chip, sawlog and veneer production, achieved through the long life of the scheme.

The project is for 26 years, which is probably the longest managed investment in the marketplace, but it meets the demands of some industry experts who claim many schemes are too short to achieve the quality of timber required.

"The blue gum rotation is 12 years and thinning of the pine is at year 10 and 18, with the final harvest in year 26," he says.

There is also pruning in years four, six and eight. This is essential to enable the trees to produce clean trunks with the foliage at the top. Trunks managed this way are easier to mill and command a higher price.

The Pinetec scheme costs $5489 per woodlot. In addition there is pruning costs, $300 in year four, and harvesting costs, which amount to $49,500 during the full term of the project. The internal rate of return for the project is put at 10.03 per cent.

Hull says one advantage of the Pinetec scheme is that there is not a yearly management fee. Other than insurance, fees are only paid when there is work undertaken on the plantation.

Another aspect of this project that will interest investors is the chance to buy shares in the company. Investors who buy a woodlot, must buy 1400 shares in Pinetec at $1 each. This offer only applies to investors who buy woodlots before June 30.

The company has been established 40 years and was the subject of a management buy-out 11 years ago. It is this management team that is behind the push into managed investment schemes.

For the financial year ending June 2000, Pinetec had a turnover of just under $13 million and a pre-tax profit of $1.5 million. According to the prospects, the earning per share in 2001 will be 35.7 cents and, in 2002, 56 cents per share. The company is expecting to pay a dividend of 9 cents per share for the 2001 financial year and 14 cents in 2002.

Currently Pinetec is talking to the West Australian government about moving its sawmill operations closer to the plantations. This would also give the company the opportunity to expand its operations to between 80-88,000 tonnes of logs a year.

Hull says the company is offering investors a fully integrated timber investment.

"We are selling a business that has a saw-milling operations, markets for its products and a growing plantation business," he says.

The production of timber for sawlogs has also attracted prospectuses from a couple of the traditional players in plantation timber projects.

ITC has launched a Hardwood Timber Project which consists of two plantation projects. The solid wood project lasts 17 years and is aiming to produce sawn log and veneer products.

The investor will pay $2,200 per unit in application, with planting at $165. Pruning costs are $1100 per unit and there are land and service fees amounting to about $350 a year. The internal rate of return for the solid wood project is 11.4 per cent.

ITC is also offering a 10-year pulpwood project that aims to produce timber for chipping.

Gunns is also offering a sawlog option as part of its Woodlot Project. The project intends to develop one hectare woodlots at a fee of $5,280 per unit. Three planting options are being offered - pulpwood, veneer and pulpwood or veneer and sawlog.

The sawlog project is 25 years will cost the investor $25,000 in rent, planting, thinning and harvesting costs over the life of the project. The income from the project is estimated to be $96,600 which will give a pre-tax return of 19.3 per cent.

PIR has reviewed this project and have given it an A rating on risk and return.

This year has seen the launch of a number of good-quality timber investments that provide a feasible alternative to woodchip projects.

The downside of these investments are the long time-frames. Logging for sawlogs from plantations is still an industry in its early stages, but nobody disputes the huge potential in the next 20 to 30 years.