Phaunos reveals 'uncertainty' in timber valuations

Phaunos Timber Fund warned of "significant uncertainty" in the valuation of some of its portfolio, and that a revenue forecast had been termed "optimistic" as the forestry investor unveiled long-awaited results of a strategic review.

Phaunos Timber Fund, which owns forestry assets in countries from the US to New Zealand, said that a review by consultancy Stafford Timberland had identified "several assets" whose valuations were "subject to significant uncertainty".

While failing to name assets whose valuations were at risk, Stafford Timberland had highlighted that 36% of the group's portfolio comprised higher risk assets "a greater proportion that would normally be expected in a timberlands portfolio" and including the Eucateca forestry in western Brazil.

Eucateca had "variable plantation quality, due to poor early survival", was more than 1,000 miles from port, yet had an "undeveloped" local market, and with trees approaching maturity.

'Weaknesses in log prices'

Indeed, Stafford Timberlands said that 2014 revenues from Eucateca and Mata Mineira, a eucalyptus asset in central Brazil, were likely to come in at $3m-6m, well below the $13m estimated by FourWinds, which exited as fund manager last year.

Stafford Timberlands cited "limited market access" for its conclusion, flagging that Mata Mineira's local charcoal market was "oversupplied", prompting charcoal prices to drop from nearly R$200 per cubic metre in early 2011 to less than R$120 late last year.

Furthermore, more broadly in timber markets, "weaknesses in log prices in China have occurred recently, which may have an impact on cash flows in the second half of the year", Phaunos said.

Stafford plan

Stafford has recommended that Phaunos dispose of some of its higher risk assets, besides taking out a loan to "make its cash position more robust", and seeking to cover operating costs solely through revenues, rather than adding in asset sales.

The comments come at a critical time for Phaunos, which is in 2016 to ask its shareholders to wind-up the fund and return cash to investors, or to continue operating, and try to reap maximum returns from its investments.

Although Stafford warned that a firesale of assets could mean selling them at more than 30% below the amount included in the company's net asset valuation calculations, that could still offer a premium to shareholders.

Phaunos shares were trading in London at 42.5p, a 46% discount to net asset value of 78p as of the end of 2013.

Market reaction

Phaunos said that it had agreed with Stafford to manage its assets, whether on a continuing basis or into a wind-up situation.

The deal is based on an annual payment of 0.35% of the fund's stockmarket value, implying a figure of about $800,000, plus warrants offering an extra kicker if Phaunos shares appreciate.

FourWinds was paid about $3m a year.

In the City, Numis analysts termed the appointing of Stafford, an "experienced timber asset manager" as "postive" for Phaunos, but added that "there remains considerable uncertainty over the medium/long-term, with the manager raising questions over the cash and valuations of assets".

Dexion Capital termed the fund's plans as "sensible", and the management feed "appropriate" in offering Stafford "meaningful value" only if the share price rises sufficient to inject value into the warrants.

The broker added: "A repositioning of the portfolio away from the higher risk assets is the most sensible strategy in the near-term, whether the company has a long-term future or not.

"Nevertheless, it remains our view that the only buyers in the near-term may be activists, and the company will have to work hard and quickly to implement the changes if it wants to ask shareholders to support it in advance, and post, the 2016 continuation vote."

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