Scott, Harmac has dropped like a stone over the past seven trading sessions. Since ticking up a bit to about $12.70 eight sessions ago after announcing their major acquisitions, the shares have dropped fully $3 to close today at $9.65 (and I bought a bunch at that price today). The shares are further down from their 52-week high of $15.50 that they reached in June.
Why have I bought into Harmac? The acquisitions of large pulp mills and timber rights in Ontario and Nova Scotia from Kimberly-Clark will roughly triple Harmac's output. More importantly, they will give the company geographical diversification, away from British Columbia, where the provincial regulatory regime and business climate has not been favourable to business generally; and they will also give the company scale economies and additional contacts and diversification in their marketing. With the conclusion of this acquisition, Harmac will be Canada's largest pure market pulp play. The company starts with a strong balance sheet, so the acquisition (to be financed through new share issues using installment receipts) does not pose undue financial risks. Moreover, the acquired mills are efficient, low-cost producers.
And what about the pulp price cycle? Until recent events in Asia all of the industry experts have been forecasting continued price improvements at least through 1998, following on the price recovery that has already materialized over the past year. Now some of the forecasts are being somewhat hedged, with perhaps a period of pulp price weakness. But, in my view, with world economic growth still forecast at about 4 percent real for 1998, and the end of the business cycle expansion not yet in sight, pulp prices should do alright. Even the weakness of some Asian currencies and slower growth in some of their economies (and possible recessions in a couple of the smaller economies) should not dent the overall picture. Depreciated exchange rates for currencies such as those of Indonesia may reduce the prices that they can charge for their pulp output, but unless they can expand their supply substantially this should have minimal impact on world market prices for pulp (and environmental factors as well as investment lags should prevent them from cranking up their pulp output very quickly).
Hence, although I am no expert on the pulp market, Harmac looks like a good play for a holding period of six months to two years. The pulp, paper and forest products sector are currently quite depressed in general, and that makes it a good time for investors to get into what is essentially a cyclical industry. When things turn significantly better for the pulp industry, there will be an investor rush for a company like Harmac. And remember that the company is profitable (19 cents per share last quarter) even at current pulp prices. It seems crazy that Harmac shares are now nearly $6 lower than they were in June despite the fact that pulp prices are now higher; this reflects an unrealistic degree of gloom about the future price outlook, and it completely ignores the attractions to Harmac of its acquisitions.
The Financial Post had a full-page article in yesterday's (November 12) issue on Harmac. It quoted several analysts who specialize in the pulp and forest products industry. Their views on the Harmac expansion ranged from "This is a great move for Harmac" to expressions of concern about the dilutive effects of financing the acquisition and about the timing of the new share issue, given the spate of other new issues in the forestry sector (such as George Weston, Stone Consolidated, and Whitecourt Newsprint).
Given all of the above, and a reasonable investment horizon (this one is not for short-term traders), Harmac looks like a good bet now. Jay |
