In recent years, capital-intensive industries have faced difficulties
in positioning themselves more attractively in the capital markets. Although the relative performance has improved in last three years, the sector is still being punished for a poor history of delivering competitive
One strong argument and likely driver of sector under-valuation stems from capital
markets' mistrust in the ability of management to properly identify investment opportunities, which would justify reinvestments of cash flows. In recent years, market growth, consolidation and strengthened capital
market governance have urged the industry not to reinvest cash flows in excess of investment opportunities. As a response, leading companies in the industry have emphasised acquisitions and restrained capex, mainly
for large growth investments. Despite this development, capex levels in the industry are still significant. Furthermore, acquisition emphasis has increased the need of capex for restructuring of company asset bases.
However, by cutting down on investment spend on restructuring and potentially well-earning investments, companies have effectively compromised future investment portfolio returns. Concerns have now focused on the
use of capital funds for sustaining and developing existing operations.
The earlier investment conduct of many pulp and paper companies has reflected an
asset-driven rather than a business-driven approach to investments, that is, assets have been maintained from the perspective of individual production lines. Capital planning decisions have more or less implicitly
assumed that the existing asset base will be sustained without really looking at competitive pressures, margin erosion and, hence, the remaining life of the machinery. Companies generally lack means of matching
top-down and bottom-up requirements in allocating reinvestment capital. By establishing best practices in the use of capital funds and by communicating their corporate profile and approach to investment governance,
companies can achieve significant results in improved capital productivity and position themselves attractively in the eyes of investors.
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