Phaunos is a timber investment fund with a strong balance sheet which has stopped investing and is trading at a substantial discount to NAV.

 

This idea is for those comfortable with the valuation of timber assets. Phaunos was launched in the boom year of 2006 and invested its IPO proceeds through 2007, 2008 and 2009. Shareholders have effectively mandated the new chairman to liquidate the business, albeit over a medium term time frame. The assets are dominated by its four largest investments:

 

1. Matariki: minority holding in New Zealand softwood producer selling logs into China. Managed by well known NZ timber investment fund and paying a dividend. Value in NAV based on early 2012 shareholder transaction. (25% of NAV)

2. Green Resources: East African hardwood/softwood. Minority investment. Value in NAV based on DCF. (20%)

3. and 4.  Mata Mineira and Eucateca: hardwood and softwood investments in Brazil. Wholly owned, DCF valuation. (28%)

 

Other assets are a mix of softwood and hardwood around the world. Limited exposure to China, no underlying debt in any of the investments. All based on DCF valuations. Net cash is $10m.

 

The investment case: this isn't a complicated investment story. The stock is trading at a 44% discount to the valuer's NAV. There is a relatively high 1.5% p.a. management fee cash drain for a few years until the old investment managers can be changed, taken in-house or somehow renegotiated but other than that it is a pure cashflow story at a big discount with very limited liabilities either at the holdco level or in the underlying investments.

 

Risks: in my view the risks here are limited to one factor, but it is a biggie. Valuing timber is an exercise in predicting timber prices for the next 'x' years and discounting the harvest back to the present day. This is fraught with 'model' risk. Phaunos has a reasonably well diversified mix of currencies, markets, types of wood and maturity. The main valuer, Forest Research LLC, are well thought of I am told.  Furthermore, the new chairman has had plenty of time to write down some or all of these assets to more realistic values if appropriate. However, to buy Phaunos you would have to be happy with the way timber is valued. There is plenty of information on the company's website on plantation maturity etc but the bottom line is that you have to be happy with a DCF. 

 

 

If you are happy with timber valuations then buying a safe, 'liquidating', cash generating timber asset at a 44% discount to NAV seems like an excellent way to play timber.

Likely disposal transactions over next few years. Also buybacks as cash generation picks up.