Adding value to Timberland Investments with DSSs

How to add value to timberland investments with decision support tools.

Transcript

1. Adding value to timberland investments with decision support tools Antti Mäkinen, CTO, PhD Simosol Oy by
2. © 2012 Simosol Oy. All rights reserved. Why forest investors do not utilize forestry IT and DSSs all that often? Why forest investors should utilize forestry IT and Decision Support Systems (DSSs) more? 2
3. © 2012 Simosol Oy. All rights reserved. 3 Utilization of decision support systems in forestry in general ‣Storing, handling, processing, analyzing and visualizing forest data ‣Modeling of forest growth and yield ‣Planning of operational activities into the future ‣Comparing alternative courses of action and the effects of the actions ‣Reporting of meaningful information from the generated plans
4. © 2012 Simosol Oy. All rights reserved. What kind of information investors want from a DSSs? ‣Information for helping in the initial decision to invest and tracking of the investment performance ‣Current value of a forest property and expectations on DCF, IRR? ‣The uncertainties associated with the expectations? ‣How to react to the changes in the surrounding world 4
5. © 2012 Simosol Oy. All rights reserved. 5 Difficulties in utilizing typical forestry DSSs in forest investment projects ‣Extensive geographical coverage of projects ‣…in varying natural environments and using multiple units of measurement and languages ‣…conforming to diverse conventions and regulations ‣…done by people that are not necessarily that much IT oriented ‣Typical forestry DSSs are not that flexible, except for expert users
6. © 2012 Simosol Oy. All rights reserved. The two extremes in analysing a potential forest investment ‣Typically two extremes: the "DSS solution" or the "spreadsheet solution” (the ”quick and dirty” solution) ‣The "DSS solution" can automate many processes, but requires a significant initial investment ‣The "spreadsheet solution" is initially a lot less expensive and more applicable to ad hoc analysis but leads to repetition of simple tasks ‣In the past, there hasn’t been that much options in the middle of these two extremes 6
7. © 2012 Simosol Oy. All rights reserved. Case ‣Valuation of a tropical hardwood plantation in Latin America ‣Need for assessing the value of the plantation using DCF approach and a ”spreadsheet solution” ‣Shortcomings of a "spreadsheet solution”: ‣simplifying assumptions about the growth ‣age structure vs. market demand do not meet ‣timber price developments difficult to account for 7
8. © 2012 Simosol Oy. All rights reserved. Typical pitfalls of the ”spreadsheet solution” in a valuation project Optimal DCF = + + Market capacity is often exceeded in harvest plans Price trends are difficult to integrate into valuation Simplified growth models lead to unreliable projections
9. © 2012 Simosol Oy. All rights reserved. ‣ Annual cash flow for a 10-year period, predicted using a simple MAI value as the growth model and a fixed regime for harvests and silvicultural operations Example valuation case DCF
10. © 2012 Simosol Oy. All rights reserved. ‣ The simple growth models were systematically overestimating the harvest potential (as well as the DCF) by an average of 5% Growth model adjustment
11. © 2012 Simosol Oy. All rights reserved. ‣ The fixed regime recommended harvests that significantly exceeded market capacity, and overestimated the DCF by over 10% Age structure & market Market capacity
12. © 2012 Simosol Oy. All rights reserved. ‣ Market price scenarios did not affect the DCF optimisation, as there commonly is no DCF optimisation in spreadsheet tools Price scenario & DCF generation Timber price scenario
13. © 2012 Simosol Oy. All rights reserved. 13 The lessons learned from this exercise ‣Real world phenomena are in many cases complex ‣What you are doing with a DSS or spreadsheet when you’re looking at a forest from an investor’s point of view, is creating a model ‣The more things you want to include in your model and the higher the detail level, the more complex the model gets ‣Spreadsheets offer you only limited set of tools for handling the complexity
14. © 2012 Simosol Oy. All rights reserved. 14 Other common bottlenecks ‣Vertical information flow, or the lack of it The flow of aggregated information from the forest- level to the decision makers The flow of directions and feedback from the decision makers to the operators at the forest-level ‣Many cases using a "broken telephone” ‣Luckily, modern information technology solutions can come to rescue
15. © 2012 Simosol Oy. All rights reserved. 15 The Nordic experience ‣Big organizations with huge forest databases and long traditions of utilizing IT in forestry ‣Recently, everybody moving to tailored web-based forest information systems ‣But, only the big players can afford these type of heavy customized IT systems ‣And, these systems are very much designed for Nordic conditions: boreal forests, long time horizon, specific forestry regulations…
16. © 2012 Simosol Oy. All rights reserved. Vertical flow of information: relevancy for investors? Forest inventory and operations databases Long-term / operative planning Reports: woodflow, DCF, IRR... Directors Forest managers Field operators Real time infrmation
17. © 2012 Simosol Oy. All rights reserved. Where is the sweet spot?
18. © 2012 Simosol Oy. All rights reserved. www.iptim.com antti.makinen@iptim.com Thank you! Questions?