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York Timber Holdings: A Discount Timber Play

|Includes:Rayonier Inc. (RYN), WY
Current price: R3.70
Current market cap: R1,205M
Current book value:  R1,984.2M
Current exchange rate: 1 ZAR = 0.147 USD

York Timber Holdings is an integrated timber company based in South Africa. After severe brush fires in 2007/8 and poor FY2009 performance, the company’s stock plunged from above R9.00 per share to below R3.00. Investors like Jeremy Grantham are very positive about the prospects for timber and it’s frequently touted as an excellent hedge against inflation, so this seemed like an interesting opportunity to explore.

FY 2010 saw a lot of earnings improvement, but the true extent was buried under revaluations and write-downs. Biological assets were revalued upwards 10.5% after a switch to DCF valuation, reversing most of an impairment recognized in FY2009 and adding R200M to earnings. Impairments to goodwill resulted in charges of R42.6M. Directly removing all non-recurring charges gives an adjusted net income of R-93.1M or a total comprehensive income of R-29.6M. Definitely an improvement from 2009, but less so than the raw numbers lead you to believe.

Improvement did continue in the six months ending December 2010. Two factors appear to be behind the improvement. The first is the drastically lower interest costs from the company’s 2010 debt reduction. Proceeds from a stock offering (about R450M out of the total raised) were used to pay down a large amount of debt and a comparison of year-over-year changes in financing costs illustrates the large savings. This more than anything else, I think, helped get normalized earnings positive again. York also managed to maintain the improvements to its gross margin that it achieved in FY2010. In fact, it boosted gross margin all the way to 46%. It’s probably unrealistic to expect gross margin to remain quite so high, but it suggests that the cost-saving restructuring York has undergone genuinely paid off for the company.

Evaluating timber investments is a bit outside my circle of competence at the moment, but a quick comparison between York and a few U.S. timber companies demonstrates that it is fairly cheap on a relative basis:

Obviously York’s P/E is inflated by the aforementioned non-recurring charges (the same appears to be true of WY from what I saw), so that’s not a terribly useful point of comparison. To me the interesting points are the substantial difference in P/B ratios and gross margins between York and the others. Investors would be buying into an improving business at a big discount to book value, which looks like a promising combination. Those with the knowledge/desire to invest in timber might find solid returns with a margin of safety by moving a little bit off the beaten path.

Investing abroad does introduce other risks like currency fluctuations. That said, the Rand/Dollar relationship has been relatively stable over the long term in the past five years. In fact, the Rand appreciated a moderate amount since 2009 and would have benefited an investment made at that time. That’s probably at an end due to pressure from manufacturing groups, but it’s reassuring to see that the country’s currency has a recent history of stability.

A related point of interest is the rights offering that York used to fund its debt reduction. The rights offering price was set at R2 per share, up to 30% below then-current prices. Of course there’s the cost of the rights themselves to consider but prior to the offering the stock price was hovering around R2.50 per share with roughly 78.4M shares outstanding. Book value at that point was about R1.35B, so the regular trading price at the time was a substantial discount to book value even after taking into account the diluting effect of the new shares. The rights offering provided potential investors with an even greater discount. It had never occurred to me to search out special-situations opportunities outside of major countries because I had assumed that information would simply be too scarce, but at least in this case that would have meant missing out on a promising opportunity. That’s a useful lesson.

2010 Annual Report:
Interim Report:
Rights Offer Terms:
Financial Statement Analysis:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: RYN, WY