Improving forest asset values by optimising cash flow returns and productivity

Charl de Villiers from Poyry Management Consulting made a riveting presentation during the recent DANA Forestry Investment Conference, on the topic of improving forest asset values by optimising cash flow returns and productivity.

The changing landscape of forestry

His first topic of discussion was the changing landscape of forestry globally and in Africa.

According to De Villiers there is currently about 100 billion dollars of investments in forestry assets globally.

“In the last 30 years one of the key themes financially in this space has been the institutionalised investment in the industry, which has grown significantly since the 1980’s, doubling in value in the last 10 years, propelling Timberland assets to an international asset class.

“Traditionally investors have been attracted to timberland as an asset class due to its strong historical returns, low correlation with stocks and bonds, tax incentives and protection from inflation.

“While the market fundamentals for Timberland investment remains sound, the growing attractiveness of this asset class has led to mature markets in the US and rapidly maturing markets in Oceania and Latin America.”

De Villiers says that buyers and sellers in this space are now much more informed, with significant competition arising when scalable opportunities arise in desirable markets as these opportunities become more and more rare.

Investors are now looking to frontier markets for new opportunities as higher prices for assets in developed and developing regions are pushing down returns expectations, but at the same time they are focusing on improving cash returns from existing opportunities.

What makes a forestry investment attractive?

The demand for quality forestry assets from institutional investors remain high with criteria for investment favouring assets with early cash flow return potential.

Key drivers for forest asset investment include:

  • Active, stable wood market with sufficient depth
  • Low country risk including secure land title
  • Positive current or near term cash yield
  • Reputational risk can be managed
  • Investment scale (including potential to expand portfolio)
  • Positive supply chain logistics (inbound and outbound)
  • Potential to increase forest productivity
  • Potential to improve value recovery
  • Local management capability and strong service industry
  • Favourable exit strategy

The fact is that with the formalisation of the global forestry industry and its classification as an international asset class, it becomes a high priced asset with decreasing financial yield. In addition to exploring emerging, or frontier markets for investment opportunities, investors have been forced to place the focus squarely on increasing efficiency and performance to better the value of the asset.

But is the focus on efficiency and performance not something that the forestry industry has been pushing for a long time?

“Yes it is,” says De Villiers, “but we are so drowned in data that it is getting more difficult to see the wood for the trees. There is always room for improvement.”

Performance improvement using forest data analytics

According to De Villiers, making use of forest data analytics is one way in which one can ensure better efficiency and therefore higher productivity.

“The fact is that we often rely on things that we can measure and understand within the forest to try and improve productivity, but data analytics is more difficult to quantify as it needs a special skillset. Therefore the significant impact it can have on the production process is often overlooked.”

There is a variety of systems out there that you can use to improve performance, and with the rapid advancement of technology, it is becoming increasingly important to have the correct tools to interpret the data that is collected and interpret the data into actionable knowledge.

While wood flow is relatively simple moving one way through a system, data flows are much more complex. Introducing new systems is not necessarily an answer to poorly performing existing systems. Understanding where your data flow bottlenecks are is key to improving systems. Thus system mapping is very important to identify possible bottlenecks within the system as well as to identify existing historical data that is not being fully utilized, while data analytics can be used to convert data into information.

“One tool that we have found particularly useful is called the Execution Gap,” says De Villiers. “This is the difference between the best possible and achievable performance and the present performance levels (with existing strategy and assets).

Some of the key points of the Execution Gap, or ExGap, is

  • The ExGap is within our control – it is most often possible to do something about it,
  • It will never be captured until it is specifically identified and quantified,
  • Often difficult to see from inside an organisation.

Outlook for global forestry investments

“While market fundamentals remain solid for future forestry investments, the challenge may increasingly be more in placing capital than securing capital,” says De Villiers.

The global demand for tissue paper and packaging is forecast to grow strongly at 2.8% and 2% per year respectively, especially in Asia, while the global softwood market is expected to grow 3% in the Middle East and Africa and 2% in the rest of the world.

According to De Villiers, Africa, with the exception of South Africa, remains one of the few places where plantations scale can be achieved. Thus, investors looking for higher returns and to secure wood fibre are increasingly looking to Africa.

De Villiers is also positive that the wood pellets market for use in generating bioenergy could increase significantly in Japan and Korea, where it is expected to increase from three million tonnes per annum, to around 15 million tonnes per annum.

De Villiers also sees a resurgence in using forests as carbon sinks with improved opportunities to monetise this, while biochemicals and liquid biofuels could still be a big game changer globally.

“But investors are looking at cash flow return as an increasingly significant factor in return determination as they search for improved productivity in operations and growth.

De Villiers also sees the forestry industry making more and more use of digitalisation in forestry management and value chains.

CLick here for more interesting articles on the 2017 DANA Forestry Investment Conference in our October edition.

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