York fans switch to amber on Norwegian firm
York Timber is a fascinating company. Because the share price can be extremely volatile, it can come across as a punter’s delight. But it is also a company that takes its investors very seriously and gives highly detailed presentations and is strong on corporate communications.
Its followers tend not to be “the usual investment suspects” but rather York enthusiasts who find deep value in the stock and who are rarely seen at any other results presentation.
It’s inherent that York’s earnings are erratic, given that, first, it relies on a biological asset that is subject to climate and other vagaries such as fire and, second, it sells many of its products into a notoriously cyclical industry — the construction sector. In recent times, York has found success by applying science to the timber industry, so that it is achieving wider logs at an earlier age, thus improving yield.
On a current price:earnings ratio of only 2.4 times and a discount to tangible net asset value of 63%, it does look compelling. And because of that steep discount to net asset value, the company has been buying back shares in the sincere belief that this will create future value for shareholders.
On the negative side, the share is tightly held. A narrow shareholder spread has 81% of share capital held by only 10 shareholders, which means price movement can be unduly influenced by small volumes.
At the recent results presentation for the year ended-June 2017, there was a palpable schism between management’s new outlook for the company and the assembled audience. At an operational level, it is virtually impossible to find new forestry resources in SA, which means that York has to look much farther afield for suitable resources. CEO Piet van Zyl gave details on the planned merger of York with Green Resources, which has its headquarters in Norway. Van Zyl and his team believe that, if implemented, this would create the largest pan-African integrated forestry player.
“This transaction opens up East Africa for us, particularly with reference to the large infrastructural developments currently taking place in northern Mozambique, Uganda and Tanzania”, says Van Zyl.
This potential merger might not be the best move for York. Perhaps the company would be better served by concentrating on the problems it faces in SA, such as its recently constructed plywood plant, rather than getting involved in a large multinational expansion programme that may or may not deliver the expected returns.
A valid suggestion was that York should wait until Green Resources goes into liquidation, at which point it could be bought very cheaply.
Another commentator noted: “This merger appears not to be a compelling one. Green Resources is struggling to find inmarkets for its products. It is a distressed asset.”
Even a cursory glance at the latest financial statements of Green Resources endorses this concern. It has been unprofitable for the past three years and this trend is deteriorating. For the 2016 financial year, a $58m loss was recorded.
Also, the auditors noted an emphasis of matter in the annual financials, highlighting that the company was unlikely to remain a going concern unless it could tap into external funding.
Van Zyl takes this criticism on the chin, nothing that York “wants to create a shareholder base with a longer-term time horizon”. He believes that in creating the merged entity, Norwegian government support will be forthcoming.
And while concurring that there is still lots to fix in SA, he sees little or no growth in the local economy. “Growth only comes via the merger,” he says. “And we need to get access to a different capital base, as the JSE one currently doesn’t like York.”
A VALID SUGGESTION WAS THAT YORK SHOULD WAIT UNTIL GREEN RESOURCES GOES INTO LIQUIDATION