Patience required with Fonterra, analyst says
AUCKLAND: Farmers and investors will need to be patient with Fonterra Cooperative Group’s overhaul of its business, which sometimecritic First NZ Capital analyst Arie Dekker says is moving in the right direction.
The cooperative’s board is working through a review of the business and has put several assets on the market to help cut the milk processor’s debt levels. It has signalled more divestments are coming.
Chairman John Monaghan yesterday described the review as preempting a fundamental change of the cooperative and the top priority was achieving topdollar from New Zealand’s valueadd products.
The focus would be on the sustainability and provenance throughout Fonterra’s supply chain, qualities that command a premium in markets such as China, where food safety is topofmind for consumers.
Mr Dekker told clients in a note yesterday the turnaround would take some time and holders of Fonterra Shareholders’ Funds units would need to be patient.
‘‘There are many strategic issues for FSF to address across the right sizing of the asset portfolio, debt and equity capital structure, and the ability to remain competitive for milk supply in NZ, given its significant embedded stainless steel capacity and desire to invest further in valueadd processing,’’ he said.
‘‘FSF must be realistic about its capability and ‘DNA’ through this process, having seen significant value destruction as it has invested away from its core business without the capital structure to necessarily withstand bumps along the way.’’
Once Fonterra figured out the shape of a leaner version of itself, Mr Dekker said it would be in a position to deal with longerterm problems around capital structure and how to position itself in the market.
‘‘We expect FSF to work out what it looks like before it turns to capital structure considerations in detail and were encouraged by management’s acknowledgement that these issues will need to be progressed and worked on in the lead up to, and beyond, the FY19 result,’’ he said.
‘‘Being clear on what it means to remain competitive for milk supply in NZ over the longer term should be a key outcome of all this work.’’
Mr Dekker has been forthright in his criticism of Fonterra’s inability to convert capital investment into earnings, and at one stage lowered his rating on the Fonterra Shareholders’ Fund to ‘‘underperform’’.
FNZC is restricted in rating the stock at the moment, given its investment banking arm is running the sale of TipTop.
Mr Dekker is not optimistic that Fonterra will pay a final dividend and is assuming it will not, citing the uncertain earnings outlook for the rest of the financial year and the company’s need to shore up its balance sheet.
‘‘While this is a not a good situation for farmers, a robust outlook for the milk price in FY19 should help support this decision if the board finds themselves in that position,’’ he said.
The Fonterra Shareholders’ Fund was launched in 2012, giving outside investors exposure to the milk processor’s earnings stream, while preserving the farmershareholders’ control of the cooperative.
The fund was launched in tandem with Fonterra’s Trading Among Farmers scheme, as a means of reducing the redemption risk, when farmers either reduce their milk production or exit the cooperative.
Fonterra was saddled with a $742 million redemption bill when milk production dropped in the 200708 drought.
Some farmers were reluctant to let the fund go ahead, seeing it as a threat to their control of the cooperative and potentially undermining the farmgate milk price. That prompted Fonterra to reduce the size of the fund as a proportion of its stock.
At the time of the offer, it was envisaged that the fund’s units on issue would amount to 7%12% of Fonterra’s shares.