Fletcher committed to lower gearing

Press, 21 October 1989, Page 36

Fletcher committed to lower gearing

Fletcher Challenge’s chief executive, Mr Hugh Fletcher, has committed the group to achieving a debt to equity ratio of 55:45 by December 31.

In the company’s annual report, he says that this target is 21 months ahead of when the goal was first set in the 1988 annual report.

Last year,'the ratio was allowed to move out to 59:41 to take advantage of opportunities, but now the company was back on track. At June 30, a ratio of 56:44 had been achieved and it is intended to keep the ratio at a tight band around this level, he says. One of the strengths of the group is the cashflow generated. This year cashflow from trading rose 19 per cent to $1.2 billion.

The company is also confident that its proposed $464 million one for seven rights issue will be successful, and the funds used for growth. Excellent progress has also been achieved in the internationalisation of the group’s shareholders’ base, with about 25% of the register now held by overseas investors. “There are nearly as many shares traded on the Australian exchange as in New Zealand.” Fletcher Challenge employs 37,000 people, and the concept of employees as stockholders is fostered. Today, employees own 27% of the group — 11% directly or through trustees, and 16% in an employee unit trust for present and future employees. The trust provides death and disability benefits to employees not otherwise covered.

“As the group prospers so too will

the trust and the range of benefits provided to employees will be extended,” Mr Fletcher says.

On a geographic breakdown of trading profits, 47% came from New Zealand; Canada, 40%; the United States, 7%; and the remainder, 6%. In product groups, forestry and forest products were 64%; building industry, 9%; and primary industries and energy, 27%. On individual product groups, kraft pulp was the outstanding performer, earnings 75% up on the previous year, with average prices 20% above the corresponding period. The 1989-90 year will be challenging. The moves made in 1989 put the group in a good position, through diversification and geographic trading spread, to ensure a sound earnings performance. The outlook for the group’s divisions include: • Paper — newsprint prices are under strong pressure because of the large number of new machines coming into production. Moves by the company’s Canadian operations to specialty grades plus low cost activities, means that production will be close to current levels.

• Pulp — Demand in key Asian markets for unbleached pulp is weakening because of increased production. The market for bleached kraft pulp exceeds expectations, although a slowing in the U.S. economy means that further price rises are unlikely.

• Timber — The North American lumber market should strengthen as U.S. housing starts to rise, the New Zealand’s demand for timber and panel products should

be stable. The Government is expected to begin selling forestry assets, and Tasman Forestry already has approval to buy 140,000 ha.

• Construction — Commercial development and construction should remain strong in Hawaii, California, the Pacific North-West of the U.S., and South-East Asia. It is expected to be subdued in New Zealand, and decline in Australia. • Building materials — Restructuring has anticipated the adverse trend in construction in New Zealand. Declining interest rates are already stimulating residential building. Demand is expected to weaken in Australia, but should remain buoyant in other export markets.

• Agribusiness — The outlook for New Zealand’s rural economy is promising. The Rural Bank provides significant growth potential, but fishing earnings may be upset by Government proposals to reduce catch quotas and increase rentals. Stable prices and strong demand for major fish species are expected to continue, and production improvements should aid profitability. • Energy — Development will continue on the construction of a second offshore gas and condensate production platform, Mavi B, in the 50%-owned Maui gas fieldl. The immediate forecast is for firm oil prices, but this depends on price stability of the Organisation of Petroleum Exporting Countries. Both the urea and methanol markets are expected to soften, although increasing demands for lower pollution in major cities are expected to help methanol.