If a tree falls in the forest, there won't be a fund manager around to hear it.
Forestry stocks are a rare holding in Canadian equity mutual funds. The bulk of small investors have little or no exposure to the wounded asset class that is restructuring and consolidating in an effort to survive. Abitibi-Consolidated Inc. and Bowater Inc. announced plans to merge yesterday in a stock-swap deal that will generate about $250-million (U.S.) in annualized cost savings.
Toronto's Beutel Goodman & Co. Ltd. manages about $15-billion (Canadian) on behalf of institutional and retail clients. There is not a single forestry stock in the extensive portfolio. "The stocks are statistically very, very cheap. It raises questions as to whether or not it's a value trap or just a really cheap stock. Our sense is there are a lot of dynamics out there that suggest we be cautious," said Beutel Goodman president William Ashby.
And among those managers that own forestry stocks, there's some reluctance to talk. Brandes Investment Partners & Co., Fidelity Investments Canada Ltd. and Mackenzie Financial Corp. all declined to discuss sector holdings.
Prudence may be well justified as Canadian forestry companies still face a long list of challenges.
In the B.C. woods, the mountain pine beetle infestation has forced many companies to cut harvest forecasts, while across Canada, there's political resistance to close unprofitable mills in isolated communities. In the marketplace, weak U.S. housing starts have damped demand, and low-cost producers in Asia, South America and Europe have made pricing increasingly competitive. And on the balance sheet, exporting costs have soared in recent years as the Canadian dollar marched to a high of 91.44 cents (U.S.) last spring.
"Canada was probably once one of the great hewers of wood. It's probably going to be less so going forward," said Andrew MacDonald, equity portfolio manager at Vancouver's Phillips Hager & North Investment Management Ltd. "These are secular trends that are in place. It's a tough investment environment."
Recent trading indicates share prices may be recovering. The Bloomberg U.S. forest products and paper index, a volatile 15-member index that includes four Canadian-listed equities, closed at 124.18 points yesterday, up 1.27 points in trading. That's up about 20 per cent from a June, 2006, low of 103.58 points and within a few points of record highs in April, 2006, and May, 1999.
Many money managers that go into the woods are aggressive, value-driven bargain hunters. They tend to snap up large equity positions across the sector.
For example, Third Avenue Management Ltd. of New York has significant interests in three Canadian forestry companies: about 6 per cent of Abitibi stock, 3 per cent of income trust TimberWest Forest Corp. and, most significantly, an 18-per-cent interest in Canfor Corp. The Canfor shares are held in a number of accounts, including the $264.8-million (Canadian) AIC Global Focused Corporate Class Fund.
Canfor was "purchased at a valuation representing wide discounts to both asset replacement values and to the likely value the company would command were it to be sold," Curtis Jensen, Third Avenue's co-chief investment officer, said in a 2006 quarterly report to investors.
Valuations across the sector are attractive, especially for companies that have weathered the storm, PH&N's Mr. MacDonald said. Vancouver's West Fraser Timber Co. Ltd. is a low-cost producer that has reported a profit in all but one of its 21 years on the public market. PH&N owns about 1.6 million West Fraser shares, roughly 4 per cent of the firm's equity.
Negative factors that hurt the stock, especially the rising Canadian dollar, "have at least stabilized, if not reversed a little bit . . . a number of fundamental factors are turning in their favour," Mr. MacDonald said.
By the numbers
Percentage gain by Bloomberg U.S. forest products and paper index since June, 2006
Percentage of Abitibi shares owned by Third Avenue Management
'The stocks are statistically very, very cheap. It raises questions as to whether or not it's a value trap or just a really cheap stock.'
WILLIAM ASHBY, BEUTEL GOODMAN
© 2007 The Globe and Mail. All rights reserved.
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