First NZ Capital grows darker on Fonterra
First NZ Capital has cut its rating on Fonterra Shareholders’ Fund units as the dairy co-operative’s seeming inability to convert capital investment into earnings growth and poor track record in adding value raises questions over its ability to retain domestic suppliers.
Analyst Arie Dekker lowered his rating on the units, which give investors exposure to Fonterra Co-operative Group’s earnings, to “underperform” from neutral, and sliced 17 per cent from his target price to $5.09. The units recently rose 0.9 per cent to $5.38.
The research house said its key concerns were the inconsistency between the growth strategy and capital structure which creates an inability to raise equity from farmers or retain earnings; poor track record in adding value from what investment has been made; and an inability to move earnings over 10 years.
On top of that, earnings were inherently volatile and neither Fonterra nor the market can predict them.
With “FSF consistently investing $800 million-plus with significant growth capex ( and indicating it will continue to) our forecasts have factored in earnings growth that has been elusive and had us questioning whether we have been too positive despite a cautious overall bias,” said Dekker in a note to clients.
He said there is also mounting concerns including what appears to be a negative bias in ingredients earnings; evidence that value-add businesses in Asia, Oceania and China have earnings inversely related to that New Zealand milk price; an increasingly poor proposition for FSF farmers to hold shares; and concerns about FSF’s access to milk in New Zealand with environmental concerns impacting the milk growth outlook.
Fonterra last week cut its projected dividend payments to a range of 10-15 cents per share from a previous forecast of 25-30 cents as increased global dairy prices pushed up what it planned to pay to its farmer shareholders.
FNZC’s Dekker said Fonterra has steadily lost market share to independent processors since it was formed.