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Phaunos Timber stable and profitable at the operating level

Phaunos Timber Fund says its NAV decreased from US$321.3 million or US$0.57 per Ordinary Share to US$278.8 million or US$0.49 per Ordinary Share, a decrease of 13% over the course of 2015, reflecting the weakness of the company’s main operating currencies against the US Dollar. Revenue from timber operations and investment income increased from US$11.7 million to US$16.3 million, an increase of 39%. Net cash inflows increased from US$6.8 million to US$12.9 million, an increase of 90%.

This was the first full year of Stafford’s management and they say the majority of the initial objectives they set out on their appointment have been achieved, either during the year or shortly after the year-end. The Board believes the Company is now stable, costs have been reduced with further savings in train for 2016. The majority of high risk assets have been realised and cash flow is now positive. While the strength of the US Dollar continued to negatively impact the valuations, the 2015 results show a second year of profit at timber operating level, and a modest increase in the underlying value of the assets in their local currencies. Excluding unrealised exchange movements and the non-recurring costs, saved by the sale of the Chinese plantations and the closure of the Boston office, the company’s result would have been a very small profit.

Disposal of non-core assets has been a major focus during the year and most of these assets have now been sold or are on a path to realisation. To date, the aggregate amount realised has been above the asset valuations and they anticipate that future sales will similarly approximate to the Net Asset Values.

In addition to the continuation vote planned for this year’s AGM, another is proposed at the 2017 AGM at which point shareholders will be asked to approve the continuation of the company for five years.

The most important restructuring event was the negotiation of an equity for debt swap in Phaunos’ largest investment, Matariki. This has resulted in the repayment of all outstanding amounts under Matariki’s NZ$235 million credit facility. Matariki sells much of its output to China. The company’s direct investments in China has been sold. They say the investment was a recurrent cash drain with little likelihood of near or medium term return. The asset lacked scale and was unable to support the structure required to manage it.

They made other realisations of non-core assets, which were a long way from generating harvesting income. These include the agreement to liquidate the assets of GreenWood Tree Farm Fund in the USA. At the time of writing, approximately US$13.4 million has already been received and further proceeds will be forthcoming over the next few  years, as other assets are realised. Despite being located in the USA, this investment was identified as being a higher risk investment due to its high operational costs and its need to develop product markets for poplar sawn timber. There are alternative agricultural uses for the land and liquidation is viewed as the best way to maximise the return from this investment.

Annual investment operating expenses have been reduced from US$9.4 million in 2013, the final year under the previous manager, FourWinds, to US$4.7 million in 2015. The 2015 costs include non-recurrent costs of US$1.1 million relating to the Boston office and its closure. Similarly, at operating level, timber operating costs have been reduced from US$6.1 million in 2013 to US$3.7 million in 2015, which of itself includes non-recurrent costs of US$1.15 million in the China operation.

PTF : Phaunos Timber stable and profitable at the operating level

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