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 Reports and Commentary from the Investment World

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TimberWest Forest Corp (TWF-UN:TO)

Everyone knows that  China needs oil, gas, nickel, uranium, steel and copper.  But in fact there is another commodity that’s more important to China than all of these. However; it is rarely mentioned.

What is it?  Timber.

What most people don’t know is that China has a dearth of wood. And they desperately need more.China needs timber for every project being built. But China lacks forests. Only about 16% of China's land is covered by forests. China needs to import most of the wood and timber it consumes. One recent study estimates that the merchantable forest stock has declined by 77% between 1950 and 1995.

China needs wood for growth,but its domestic market cant supply it all.  Today, for example, China has to import 75% of its wood pulp,the raw material for making paper.

From 1972-2001, an investor in timber saw average annual returns of over 14.5%.  If you had invested $10,000 in timber in 1972, you'd be sitting on over half a million dollars by now. That's better than stocks, property/real estate and bonds.  Timberland is a conservative yet high-yielding investment, an excellent choice for clients who can afford to put their money in for the longer term. Timber investments have consistently beaten the stock market and generated an average annual return of 14.5% for the last 30 years, and yet most investors will have totally overlooked this asset class. Very few people will have Timber as an assetclass in their portfolio, simply because few people actually understand timber well enough to invest in it.

There are lots of different ways in which timber companies can produce revenues, besides just the timber itself:

Biological Growth of Trees. This is where 65% to 75% of timber returns come from. The trees are genetically  engineered from superior stock, treated with specially designed herbicides and pesticides, and constantly monitored in order to increase the chances of survival and growth. Timber stands provide income at various points throughout each rotation.
But it's not just the wood that makes these trees so valuable. Forests are also responsible for producing products such as adhesives, turpentine, waxes, polymers, gunpowder,medicines (such as aspirin & quinine), charcoal, and fertilizer.

Pine Straw. This is bundled up and sold as mulch in garden centres and nurseries.This spin off alone, generates  over $50 million in sales annually in the U.S.

Seed Collection. Evergreen trees drop pinecones. That's how they reproduce. On a tree farm, these cones are collected and sold to places like China, where the trees don't grow naturally.

Land-Use Fees. Timber companies allow hunters, birdwatchers, campers and hikers to access their lands for a fee. These fees contribute to the overall profitability of the company.

But of course the ace in the hole is the fact that timber companies own large tracts of land in good locations near major highway interchanges or hectares just beyond the outskirts of developing areas, like booming towns, or expanding cities. If major developers become interested these tracts of land can be sold off for big profits.

TimberWest owns so much land that its holdings are bigger than some states in the U.S.  Most of TimberWest’s holdings are on Vancouver Island, Canada. The company owns 11% of the island.  This is prime tree-growing country. Trees in the Pacific Northwest actually average 8%-10% growth per year, versus 5%-7% growth in the Southeastern United States.  TimberWest owns the the high quality woods and that’s exactly what Asian buyers want. 

Even better, TimberWest is ideally situated to pick up some large real estate sales as well. The land it owns around Vancouver Island is stunning. TimberWest already has about 15,000 acres earmarked for real estate sales. 

Real estate prices have improved over 70% on Vancouver Island in the past five years. Given this dramatic increase, TimberWest retained the consulting arm of Colliers International (Colliers International Realty Advisors Inc.) to undertake an independent evaluation of their entire real estate portfolio and update the size and other attributes of their higher and better use (HBU) properties.

The results of this study indicate that the portfolio of HBU lands over a five-year planning horizon has increased significantly. Timberwest has now identified in excess of 10,000 hectares of HBU lands worth between $150 million and $200 million that would be available for sale in the next five years, meaning that there is the potential to sell an average of $30 million of HBU lands per annum. 

These real estate sales can act as a buffer for weakness in export log and lumber markets and may augment the Company's ability to fund distributions in the longer term.

The current market value for TimberWest is under U.S.$900 million. This looks very cheap, given all the above.

By buying into TimberWest you get 825,000 acres of prime timberland. Of that, there may be as much as $200million in land sales potential. Plus you get a rock solid 8% dividend. This dividend is sustainable. The company recognizes that its shareholders appreciate a stable dividend payment. The company has paid $0.27 per quarter since 1998.
And by charter, it plans to pay $1.08 dividend per share per year until the year 2038, at least.

Timber has been a great performing asset over the long term. But it has stagnated a bit in recent years. In the last three years shares of TimberWest are up only 10% (in Canadian dollars).
TimberWest in Canada, has been overlooked. It appears to be a very good buy at the moment., especially as the U.S and Canada have just signed a deal on softwood lumber. 

Buy TimberWest Forest Corp now (TWF-UN:TO) It should be a great low-risk winner for the next several years.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.