A rare hint of value in the timber sector

There isn’t much around at the moment that comes really cheap. And anything that does tends to fit firmly into the ‘cheap for a reason’ category. But occasionally one comes across something that looks like a deal.

At the moment I am hovering around buying shares in Phaunos Timber (LSE: PTF). We’ve written about it a few times over the years in MoneyWeek, and it has rewarded us by all but collapsing. It is now trading on a 40% discount to its asset value. To some that will look like just deserts.

The firm was launched in 2006 at the peak of the US housing bubble. It then had what Dominic Fisher or Thistledown Capital calls a “bad beginning”. Timber prices fell, it became impossible to raise the £2bn the fund had once hoped for (and set themselves up to receive), the trust’s operating performance was rubbish, and management fees (including a badly structured performance fee) eroded capital.

Only 40% of its assets are invested in are wholly owned. The 60% that aren’t are relatively ‘opaque’ – leading to some concern that they haven’t been properly valued. This worry was compounded recently when one of the funds largest minority assets in New Zealand saw a write down after a transaction.

Then there is the dividend – it has been cancelled. The result of all this is that the net asset value (NAV) has fallen by about 2.5% a year since 2006, and the share price has fallen by 8% a year.

But according to Fisher, there are a good many reasons to be cheerful. There are new board members, and in particular a new chairman, Sir Harry Studholme, who is currently the chairman of the Forestry Commission and an active forester himself. He also owns 400,000 shares.

The new board has commissioned an independent valuation of all the assets to boost confidence in the NAV. They have also confirmed their commitment to a continuation vote in 2016 (so irritated shareholders will be able to vote to wind the whole thing up) and appear to be being reasonably firm with the managers who have been instructed to simplify the business rather (selling stuff in Serbia, closing stuff in Uruguay).

Still, even with corporate governance under control (hopefully) the case still rests on timber prices. Up or down? Fisher points out that US timberland returns are rarely negative for more than two years in a row and that housing starts have been increasing – up 24% on 2012 in the first eight months of the year. Worth looking at perhaps.