Tiaki Plantations

HHIT holds an interest in Tiaki

Tiaki Plantations (Tiaki) is located in the Central North Island region of New Zealand. Tiaki operates a 27,445 hectare plantation estate that was acquired in June 2004 and enjoys close proximity to road and rail infrastructure, allowing efficient transportation of logs to mills and ports.

Performance highlights 2011

The annual return was adversely impacted by the December 2010 KPMG independent valuation, but was able to recover partly due to a strong operational result during the second half of the year. The independent valuer's downward revision in the valuation reflected a materially revised long-term outlook in the US dollar/NZ dollar exchange rate and hence NZ dollar-denominated log prices.

EBITDA and Net Product Revenue (in NZ dollars) for the financial year were above budget by 17.5 percent and 3.1 percent respectively. The strong result was mainly due to higher export market volumes and prices. Export market prices were 7.0 percent above budget and, combined with increased volumes of pruned, large utility and industrial logs, led to a favourable revenue result. US dollar denominated prices for logs delivered into Asian markets rose strongly on the back of strong Chinese and Indian demand.

The end of the financial year saw signs of oversupply in the Chinese market. The Indian market was also headed for oversupply towards the end of the financial year as logs were diverted from China and the Korean market reacted to the situation by buying only what was needed, in the expectation that prices will fall in the future. The Indian market has since recovered from the overstocked situation as intense post monsoon demand has reduced inventory to more manageable levels and prices have increased.

In the domestic NZ market, construction remains subdued and domestic processors exposed to the lumber market are being adversely affected by the strength of the NZ dollar relative to the US dollar. Whilst domestic pulp demand remains strong, structural log demand is waning as NZ housing starts remain low, and any lift from the Christchurch rebuild is now not expected until later in 2011 or early 2012.

The higher than budgeted NZ dollar, which appreciated by 20.0 percent over the year against the US dollar, adversely impacted both export market returns as well as domestic pulp prices, which are priced in US dollars. The strength of the Australian dollar, which appreciated by 5.0 percent relative to the NZ dollar, also had a negative impact on the Australian dollar denominated return of the Fund's investment in Tiaki.

In the aftermath of the natural disasters in Japan, the plywood market tightened considerably due partly to lost capacity and to a larger extent due to pricing strategies from other Japanese manufacturers in unaffected parts of the country. A longer-term increase in demand is expected once the rebuild in northern Japan starts in earnest, which is likely to be six to nine months away. The Japan packaging market relevant to Tiaki remains steady whilst some price erosion is anticipated over the next few shipments.

Ocean freight rates within the smaller Handysize vessel sector of the Pacific Basin have only recently shown signs of abatement as demand for ships fell with the weakening export markets, although this sector is exhibiting more resilience than the larger charterers. Consistent with its shipping strategy, Tiaki entered into a new 12 month Contract of Affreightment with a new shipping counterparty as another of its contracts recently expired. This will cover an additional 10.0 percent of Tiaki's export volume over the next year and result in approximately 30.0 percent of Tiaki's export volumes covered by Contracts of Affreightment for the ensuing 12 months.

The June 2011 independent valuation carried out by KPMG resulted in a 14.4 percent writedown in Tiaki's carrying value in local currency terms over the year. This reflects the material revision in the long-term NZ Dollar/US dollar exchange rate which was only partially offset by favourable changes to the discount rate and positive revisions to Tiaki's operating assumptions.

Performance outlook

The budgeted financial year 2012 EBITDA is lower than in financial year 2011, but significantly higher than anticipated in the previous long-term plan, primarily due to an improved outlook in export sales volumes and prices. This outlook may be tempered going forward by any slowdown in the growth rate of the Chinese economy as well as the NZ dollar/US dollar exchange rate.

A recent easing in the Chinese market due to high log inventories from increasing deliveries from North America is likely to trigger a price softening cycle. The intensity and duration of this cycle will depend on how quickly the supply could be brought back to more conservative levels.

There has been some recent evidence that the NZ construction market may be turning with building consent applications showing a monthly increase in July 2011, the first upward trend in many months, but no significant improvement is foreseen in the 2012 budget year. Reconstruction funding for the Christchurch earthquake is now underway, which will make money available for new housing projects.

To the extent market conditions allow, uncommitted volumes will continue to be directed at short notice to either or both the export and domestic markets according to the prevailing conditions at that time with the objective being to maximise returns and asset value.

Continued increases in demand are expected to support medium to long-term delivered log prices into Asia, however prices are expected to decline significantly from current levels through to mid 2012, as global log and lumber supplies, particularly from the USA and Canada, exceed current consumption levels. High in-market inventories of both softwood lumber and logs will be a feature in this market until residential and commercial construction activity in the USA increases.

A further focus of the management team over the next year will be the refinancing of Tiaki's existing NZD$107 million term debt and working capital facilities which expire in June 2012. Management is developing a refinancing strategy which will give regard to the company's broader capital structure and assess the options available with respect to the level and term of bank debt.