Hancock Victorian Plantations

HVP is Australia's largest private timber plantation company, with estates of approximately 245,000 hectares. The company was established following the privatisation of the Victorian Plantations Corporation in 1998. HVP then acquired Grand Ridge Plantations (formerly Australian Paper Plantations) in 2001.

HVP generated $98.4 million in revenue during the year, representing a 2.6 percent improvement on the previous year, while EBITDA was slightly below the previous year, but exceeded budget expectations. Total wood volume sold slightly increased in line with expectations, at 3,120,000 cubic metres.

The outlook for 2007/2008 is positive. The Australian sawn timber market reached its cyclical low point in 2006/2007 and has since picked up. Operational performance improved, with increases in price and volumes while moderating fuel prices reduced costs.

HVP also benefited from record high woodchip prices driven by increased demand from both Japan and China. This increased the price of HVP's pulpwood, and contributed to an increase in earnings from its 50 percent owned subsidiary, Softwood Plantation Exporters (SPE).

Victoria's drought affected performance, inhibiting planting operations, increasing seedling mortality and triggering summer bushfires. HVP employees attended 72 separate fires to protect company assets and adjoining property.

Management mitigated fire losses through a comprehensive salvage operation, harvesting the burnt areas while they remained viable, but HVP lost 2,274 hectares in plantation and a nursery to the bushfires. The overall economic impact is estimated to be over $5 million.

Total cash flow for the year was below expectations because of a smaller than anticipated area of the estate being developed under the arrangement with Willmott Forests. HVP therefore had to fund some additional planting costs, but will benefit from the additional revenues when the plantation is harvested. This effect was partly offset by the purchase of 570 hectares of suitable new land for use under the Managed Investment Scheme (MIS) arrangements during 2007.

During 2007, HVP also signed a non-binding Memorandum of Understanding to sell around 8,000 hectares of conservation land from its Strezlecki Ranges plantation to the Victorian Government. The Government has also agreed to a range of variations to HVP's licence arrangements. HVP will be issued with a licence for a once-only harvest of certain custodial areas within the area and elsewhere in the estate, followed by regeneration to native forest. This was required to meet contractual obligations to Australian Paper's Maryvale mill.

HVP refinanced its debt facilities during the year and a significant reduction in margins was locked in for a five-year period. An acquisition facility was also arranged to allow more flexibility in increasing plantations under management - in particular for land suitable for on-selling under the MIS arrangements and carving out HVP Holdings from the banks' security to increase the flexibility of the business.

HHIT's independent valuer wrote up the value of HHIT's interest in HVP as at 30 June 2007. This was supported by observed implied discount rates on a range of recent transactions indicating that some re-rating of the sector has occurred since HHIT made its investments. Hancock's independent valuer, Pöyry, came to the same conclusion and adopted a lower discount rate.

Hancock Victorian Plantations
Financial and operational performance

* CAGR: Compound Annual Growth Rate