State-owned logging company VicForests relied on a $4.8 million payment from the Andrews government to turn a profit this year for it's work, including creating homes for the critically endangered Leadbeater's possum.

The beleaguered logging company, which has been trading at a loss for many years, has been paid to build 72 artificial tree hollows, in an experiment to see if the possums will nest in them.

A logging coupe in the Toolangi State Forest in Victoria's central highlands. Credit:Jason South

The annual report said possums had been observed nesting in 39 of the artificial hollows, in a highly encouraging sign.

But Sarah Rees, director of conservation group My Environment, said VicForests was now in the absurd position of being paid to conserve a species it was also pushing to extinction.