Agribusiness Investments: Forestry with FEA

Written on the 14th of December 2009 by Continuum Financial Planners Pty Ltd

Why you should buy Agribusiness?

World demand for plantation timber is growing each year. It is anticipated that demand for timber products will increasingly be satisfied from plantations as environmental pressure slows traditional harvesting of native forests.

When you invest in forestry with FEA, you’re investing in a timber plantation that will provide forest products for one of Australia’s leading vertically integrated plantation forestry and forest products companies.

Who is FEA?

Forest Enterprises Australia Ltd (FEA) is a significant ASX-listed forestry and an increasingly emerging forest products company.

FEA was established in 1985, and has a proud, continuous history as a forestry company. FEA has grown to become one of the largest timber plantation managers in Australia with approximately 52,000 hectares of hardwood eucalyptus plantations in Tasmania, New South Wales and Queensland.

FEA Plantations Ltd, a wholly owned subsidiary of FEA, commenced its first managed investment scheme in 1993 and has issued a new woodlot project every year since then. Since its first offering in 1993, over 8,500 investors have contributed to the establishment of these eucalypt plantations under FEA’s management.

By choosing to invest in forestry with FEA, you’re investing with an established, vertically integrated forestry and forest products group that during 2008 processed and marketed close to 1,000,000 tonnes of plantation forest products for Australian and export markets. In addition, investors gain a longer-term investment with the potential to provide significant future income. The FEA group selects land, establishes plantations, grows trees and valueadds the timber produced.

FEA has vigorously pursued its long-term stated strategic goal of vertical integration through innovation and technology. It has developed, and continues to increase, a substantial volume of independent private plantation forest resource to process through its innovative, advanced processing facilities and market through both its well-established and developing brands.

It has added processing and value-add to both its hardwood and softwood resources through its new state-of-the-art sawmilling facility at Bell Bay in northern Tasmania, producing an output next year of approximately 400,000 tonnes of logs branded as EcoAsh® and BassPine® products. This volume, which is expected to grow to over 650,000 tonnes within a five-year timeframe, makes FEA the largest plantation-based saw miller in Tasmania.

Additionally, during 2008 FEA exported around 500,000 tonnes of woodchips through SmartFibre Pty Ltd, a joint venture plantation based woodchip export operation also located in Bell Bay Tasmania.

How Can I Invest with FEA?

The annual FEA Plantations Projects provide Growers with the opportunity to invest in a business growing either eucalypt Hardwood or radiata pine Softwood trees on ½ hectare Woodlots located on plantations in Tasmania, northern New South Wales or south-east Queensland. A recent innovation has been to add an offering of African Mahogany plantations – which will be grown in the Northern Territory.

There is a range investment options offered each year. The intended use, period to harvest and ongoing costs vary depending on the investment option selected. The options are set out each year in the Product Disclosure Statement (PDS). Applicants may choose to apply for Woodlots in either or all options and the Responsible entity  in its absolute discretion, may determine to close some or all offers earlier than expected, if demand exceeds the available Woodlots on offer.

How will investing in timber benefit investors?

Forestry investment offers a unique and flexible opportunity for many thousands of Australians to better plan their financial futures in both the short and longer term.

The Australian Government has ensured the 100% tax deductibility of investor’s costs for forestry managed investment schemes, and investors receive an immediate tax deduction for their investment. This can be used in various ways to improve an investor’s financial position in the short term.

At the same time, investors are making a medium to long term investment that has the potential to deliver a significant return at harvest, and one that compares very favourably with alternative investments such as superannuation, shares and property.

Forest Enterprises Australia (FEA) is one of Australia’s foremost forestry investment managers and offers a wide range of forestry investment options to suit the individual needs of investors.

A forestry investment is suitable for a wide range of investors. An FEA forestry investment is not only appropriate for high income earners who are looking for significant immediate tax deductions and an attractive longer term investment. It can also be used as a financial planning strategy for ordinary families with household incomes from $50,000 to assist with family tax and childcare benefit planning.

Depending on an individual’s own circumstances, the additional disposable income created by the tax deduction from forestry investment can also be used to reduce other non-deductible debt. A common example is to use the extra cash-flow to help pay off a home loan more quickly, saving interest and reducing the loan term.

There is a wide range of FEA forestry investments, and they can provide income at harvest, usually in around 13 to 25 years time, and may also provide an intermediate income from a ‘thinnings’ harvest around year 9. For investors, this potential future income is a valuable supplement to their superannuation and other savings and investments.

The ability to finance your forestry investment (in approved circumstances) means that it is possible to gain a potentially valuable investment asset, and take advantage of its immediate taxation benefits, at a very affordable cost.

Performance History of FEA?

FEA is independently viewed as the industry leader for growth rate and harvested plantation yield.

Current projections indicate that the second project, which is currently being harvested, is set to deliver a stellar return to growers estimated at slightly less than 12% per annum (pre-tax). The inaugural Forest Enterprises Australia Ltd (FEA) 1993 MIS project (1), which was finalised during the 2008 year, returned its grower-investors in excess of 12% p.a. cumulative over the 14 years of their involvement. (2)

Late in 2007, FEA commissioned an independent report from a respected forest industry analyst IndustryEdge to review industry research literature and other sources for the purpose of comparing the estimated growth rates for FEA's 1993 project and subsequent projects with publically available data of comparable Eucalypt projects established elsewhere in Australia during the same period.

This report, entitled "Comparison of Pooled Eucalypt Timber Investment Growth Rates", IndustryEdge says: "In general, the published and reported growth rates of these early projects which have been harvested have been disappointing with actual yields for most companies being around 20% below the lowest end of their forecast range. The exception to date has been FEA - the anticipated return for its inaugural project should not only exceed the growth rate forecast by 16%, but exceed the actual harvested plantation yield of its peers by between 45% and 75%."

IndustryEdge also says: "The timber harvest volume for the early FEA projects should meet or significantly exceed the respective targets in all except the 1995 project which is comparable with the best yields being reported by other companies."

FEA has prepared Fact Sheet No 2: "The Forestry Investment Specialist That's Outgrowing the Rest" which explains how plantation growth rates are expressed, compares FEA's performance to several other forestry investment managers, and explains how FEA has been doing it right - right from the beginning.

FEA aims to deliver the highest possible returns to growers - and achieving higher plantation growth rates - as well as higher prices for value-added sawn timber products (not just pulp logs) are the main keys to achieving this aim.

How can Continuum Financial Planners help?

Our financial planners are generally available to advise you on strategies that will benefit your wealth accumulation planning with the incorporation of agribusiness assets: the availability of the various products for use with this strategy is determined by the approval of the appropriate participants, by the Securitor investment team. Contact us to discuss your needs and the availability of researched, ATO-ruled projects at the relevant times. We will cover the cost of your first appointment.

1.1993 Tasmanian Forests Trust No 1 ARSN 093 165 210
2. Pre-tax return takes into account 100% tax-deductibility of growers' costs, but does not include tax payable on harvest proceeds. Calculation is based on top marginal tax rates.