Plantation Valuation

Introduction

World demand for certified wood products is growing exponentially, making sustainable forestry an increasingly interesting investment opportunity. Commercial forest plantations have been successfully developed in Central and South America, yet Africa's huge potential has remained virtually undeveloped.

But in Africa too there is a growing interest in sustainable forest investments and investors and plantation managers require accurate and up to date information regarding the value of their forest plantations as a measure of financial performance and transparency.

Insights into value and risk of forest investments in Africa are key issues to attract more investors to the continent.

FORM Ghana has developed an independent and acknowledged methodology to valuate forest plantations to support forest plantation managers and investors and can thus contribute to the promotion of forest plantation development in Africa.

Target group

This service is intended for individual forest plantation companies, from small to large size, and investors who wish to value the standing tree volumes in their plantations.

FORM's Experience

FORM's experts have years of experience in providing independent valuations and due diligence services for forestry investments. We executed valuations for major international forestry investment funds in the Netherlands within the framework of approval of Forestry Investments by the Authority Finacial Markets (AFM) of the Central Bank of the Netherlands.

FORM's valuations were mostly performed for teak plantations in South and Central America. Current expansion of plantation activities in Ghana offer opportunities to provide valuation services for clients in Ghana and other African countries as well.

Due to FORM's extensive forest valuation experience in combination with extensive experience in sustainable forest management in Africa, clients are assured of reliable and realistic advice.

Contents of the service

Input of the valuation

The valuation is based on the following information:

• Measurement data consisting of:
  1. Statistical representativeness of the plots;
  2. plot size and the location of the plots on a map;
  3. diameter at breast height (DBH) plus height of the trees in a plot;
  4. tree species;
  5. organisation of the plantations (age, planting, surface, every compartment is described as individual as possible; a parcel is unique if the combination of age, species and way of planting differs from other parcels);
• Forecasted harvest costs of the plantations of the client for each year of the rotation as well as information on the costs of tending management to be delivered by the client.
• Discount rate: FORM will propose a discount rate and provide it with a thorough argumentation in collaboration with the client.
• Agreed basic assumptions of the valuation (product choice, inflation rate, degree of processing, discount rate, etc.). To be determined together with the client.
• Subdivision of the timber in distinct quality classes (assortments). To be determined in collaboration with the client.
• Timber prices: These are the outcome of the timber market study as proposed by FORM Ghana.
• The basis of growth and yield prognoses will be formed by yield tables. FORM Ghana will develop these tables based on scientifically developed growth tables combined the growth data of the plantations, which the client provides to FORM Ghana.

FORM Ghana will use the software programme "NPV Tool" for the execution of the valuation. NPV Tool was developed by FORM's specialists and returns a complete DCF calculation. FORM Ghana will assure the transparency of the tool and create insights into the calculations by means of Excel sheets.

The results of the valuation can fluctuate depending on the provided input data and the management carried out in the field. Especially with regard to the representativeness of the measurement plots consistency is required. As long as the measurement plots are representative for the whole plantation the valuation will be representative as well.

To ascertain high quality input data and a clear division of responsibilities FORM has the following approach for the use of inventory data:

• The client is completely responsible for the delivery of representative, useful and reliable inventory data. Usually this information comes from recent inventory data from the internal monitoring system of the clinet's plantations.
• FORM Ghana will randomly check the validity of the data in the field, and check the consistency of the methodology in the field. This will be done through a visit and sampling of the monitoring plots and subsequently a comparison with the data that were provided.

Methodology of the valuation

The following activities are carried out for this service:

1. Determination of and discussion with the client about the assumptions for the methodology to be used.
2. Collection of the required data: recent inventory data of the plantations of the client and recent timber prices (market study).
3. Sample survey of the plantation sites of the client. The exact number of sites to be visited shall be decided in collaboration with the client. The survey will comprise three modules:
   • verification of the inventory through diameter and height checks;
   • verification of areas on effectively planted (‘active') plantation area;
   • verification of plantation status on stand level through stems per hectare, diameter distribution and height development.
4. Process, harmonise and compile the data, where necessary in consultation with the client.
5. Entering the compiled data in NPV Tool to determine the NPV and analysis of results.
6. Draft report and discussion of the draft report with the client (one meeting). During the meeting emphasis will be put on potential adjustments in the data.
7. Completion of the final report including feedback from the client.

Output of the valuation

The output of the valuation can be summarised as: NPV of individual forest stands of the plantation, of which the sum returns the overall NPV of the plantation.

Output on a more detailed level is the calculated values of present and forecasted stand parameters such as basal area (measure of stand density), number of stems, timber volumes and NPV of harvested (thinned) and standing stock.

Benefits for the client

Every company deals with investors, shareholders and wider stakeholders. Independent valuations for such external parties provide financial transparency and an up-to-date insight into the value of the biological assets of the company, which normally represent the majority of a plantation company's assets.

Internally, valuations provide decision support for managers to develop or adjust company strategies based on financial expectations.

On the operational level the valuations return useful information to assist thinning and harvesting decisions. Such information is obtained, because the financial consequences of the actual management regimes the company applies are evaluated. This way the valuation is a tool for medium and long term planning.

Finally, the outcomes of the valuation can assist the plantation manager in planning and timing of timber sales, through the forecasted harvest timing, expected volumes and related revenues.