Unifiber: a high risk, speculative punt?


IN December, loss-making forestry-related United Fiber System, or Unifiber, dominated the actives in the small-cap world. The stock doubled its market value in a matter of weeks, rising from around 16 cents to 29 cents by Dec 24.

But the euphoria was short-lived. On Dec 27, the stock plunged almost 25 per cent after Singapore's largest broking house, UOB Kay Hian, tightened trading controls over the stock. The move prompted Kishore Dass, Unifiber's chief executive officer since September, to challenge brokers' claims that Unifiber is merely a 'concept stock'. Yesterday, it was trading around 26.5 cents a share.

Still, little is known about the stock that is popular among punters. It appears that only DBS Vickers Securities covers the company. The local brokerage has a 'buy' rating on the stock, with a target price of 27 cents. What exactly does Unifiber do and is it worth taking the roller-coaster ride?

Name change

The company was listed in May 1997 as construction and property firm, Poh Lian Holdings. After it acquired a new core forestry business in May 2002, the group changed its name to Unifiber. It is now in the midst of a transition towards forestry and pulp businesses, which are expected to contribute more than 80 per cent to group sales by 2008.

In 2003, the company has undergone a major revamp and sold off its loss-making non-core businesses. DBS Vickers said it is now poised to take a giant step into the lucrative US$100 billion a year pulp and paper industry. It is currently in a joint venture with China National Machinery & Equipment Import & Export Corporation (CMEC) to build a wood chip plant and a pulp plant in Kalimantan, Indonesia, with a production capacity of 700,000 tonne wood chip and 600,000 tonne dry pulp respectively. Once completed, Unifiber could become Asia's largest chip and pulp plant.

It also has a forest concession area about four times the size of Singapore. This concession guarantees the long-term supply of low cost raw material to its 600,000 tonne a year bleached hardwood kraft pulp mill, expected to be completed only in mid-2007.

Unifiber also has two long-term agreements that guarantee the off-take of 90 per cent and 80 per cent of its pulp mill and wood chip mill output respectively. The agreements with CellMark and CMEC ensure ready buyers for the group's projected output.

'If both the wood chip and the pulp mills begin operations as we projected (in mid 2005 and 2007 respectively), we believe the group will see a phenomenal growth in operating profit commencing 2005, reaching an optimum level in 2008,' the DBS Vickers report said.

'The group should record operating profit of over Singapore $300 million in 2008, with full year contributions from forestry as well as wood chip and pulp mill divisions,' it added.

Things cannot look any brighter. In December, Unifiber said its loans, including a US$690 million funding, have been confirmed and that insurers have agreed to cover its pulp and mill project. All necessary loan documents are expected to be completed by March 31, 2005.

The world paper industry in 2003 was an estimated US$110 billion industry, growing at a long-term average rate of 1.6-2.8 per cent a year. DBS Vickers said while pulp prices are highly cyclical, the long-term trend is still upwards as demand continues to grow, cheap sources of raw materials diminish and the capital cost of mills increases.

Erratic performance

'As costs are largely fixed, pulp price increases will flow directly to Unifiber's bottom line,' the research house said.

But investing in Unifiber is not without risks. Historically, the group's performance has been erratic over the last six to seven years. Looking ahead, the ride is not going to be smooth sailing either.

While funding may be in place, the company may be stretching its balance sheet to fund its share of the mega US$863 million pulp mill project. Its 8 per cent gearing in 2003 will soar to 150 per cent in 2006. The company is also embroiled in a legal dispute with the Indonesian Ministry of Forestry over its forest concession right in Kalimantan. There is always a remote possibility that this right could be revoked. There are also the high execution risks involved in its forestry businesses as well as the inherent risks in investing in Indonesia.

Construction of the pulp mill takes 30 months to complete. This means the earliest revenue can only be expected in the second half of 2007. DBS Vickers puts the value of the stock at 10 cents a share according to its worst-case scenario and closer to its discounted cash flow value of 92 cents a share as and when the pieces of the business plan fall into place. In short, Unifiber remains a high risk, speculative punt on its forestry ventures.

《The Business Times》


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