China property fears steal thunder from Phaunos

Phaunos Timber Fund highlighted the setback to world timber prices from a softening in Chinese prices but unveiled a potential fillip nonetheless for its holders of its poorly-performing shares the first rise in its net asset value in three years

The London-listed group, whose forestry assets are spread from Alaska to New Zealand, highlighted "downward pressure" on prices for logs being shipped to China thanks to a back-up at ports of inventories encouraged in by record high prices earlier in the year.

The market for China A-grade lots reached an all-time high of NZ$160 per cubic metre during the first quarter of 2014.

The fund also noted that Chinese growth eased to 7.5% in the first quarter of 2014, and that "growth in Chinese [timber] imports is expected to slow this year".

China slowdown

The comments follow the People's Bank of China move last week to urge banks to easing lending restrictions in a drive to support the country's property market, in which price growth is decelerating.

A report over the weekend showed that year on year growth in new home prices in 70 cities tracked by China's government slowed to 6.7% in April, compared with a rate of 9.6% in January.

Nonetheless, Phaunos Timber Fund highlighted that China's timber imports are still forecast by Hardwood Review to exceed last year's, and that long-term dynamics are in favour of the housebuilding which is a major wood consumer.

"China's central government plans to relocate 250m people from rural areas to cities by 2025, which will underpin ongoing strength in the construction sector," the fund said.

It also highlighted stronger demand in some other countries, including New Zealand and the US, as saw mills raise volumes of processed timber for home construction.

Although US housebuilding was slowed early in 2014 by the unusually cold winter, "a quick recovery is expected as the weather improves", Phaunos said, quoting estimates from the National Association of Home Builders' that housing starts will reach nearly 1.1m this year and top 1.5m in 2015.

Asset value recovery

However, if market signals are mixed, one factor which has moved in favour of Phaunos Timber Fund is the dollar, whose weakness has lifted the value in dollar terms of the fund's assets, many of which are priced in currencies such as the New Zealand dollar and the Brazilian real.

The group said that the net asset value of the group had so far in 2014 risen by $15.8m to $434.8m which would represent the first increase in since the first half of 2011, when it reached its peak of $621.6m.

A rise of $15.8m would raise the net asset value per share by about 3 cents nearly to 81 cents, on calculations.

Market reaction

Nonetheless, Phaunos shares closed down 1 cent at $0.43, against the backdrop of the China property market concerns, and with investors still awaiting the results of a strategic review by Stafford Timberland.

This is being undertaken as part of the shake-up of the group under the chairmanship of Sir Harry Studholme, which has also seen the group take its investment management in house, saving on fees to FourWinds Capital Management.

At London-based VSA Capital, Edward Hugo retained a "buy" rating on Phaunos shares, with a price target of $0.66 cents.

"With underlying improvement in many of Phaunos Timber Fund's key markets and indications that key currencies may go the right way this year, we remain buyers," he said.

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