Fonterra price fall follows downgrade

Fonterra’s unit price has fallen to a three-year low following a downgrade to its financial forecast yesterday morning.

Fonterra reduced last season’s farmgate milk price to $6.70 per kilogram of milksolids from $6.75/kg, after placing shares in a trading halt yesterday. The downgrade will mean farmers owning an average herd size will take about an $8000 income hit for the 2017-18 season.

It is also likely that the full-year dividend will be just the 10 cents already paid in April.

The dairy giant has been punished by investors, with the Fonterra Shareholder Fund being the worst performer on the New Zealand stock exchange in morning trading yesterday, falling 3.13 per cent in its unit price.

Shortly after the trading halt lifted, Fonterra’s unit price fell to as low as $4.95. Its unit price hit an alltime low of $4.59 in June 2015.

Craigs Investment Partners head of private wealth research Mark Lister said the price was a threeyear low and Fonterra was in need of a restructure and new leadership.

A new chairman, John Monaghan, was appointed last month and a new chief executive will be chosen when the incumbent Theo Spierings resigns later this year.

As New Zealand’s biggest company Fonterra should instil pride in Kiwis, Lister said.

‘‘It should be something to be proud of across the New Zealand market rather than an underperforming business that hasn’t quite got its structure right,’’ he said.

Fonterra’s long-term unit price was ‘‘disappointing’’ considering the New Zealand equities market had experienced a stellar run in recent years, Lister said.

Yesterday’s price was particularly ‘‘ugly’’ when contrasted with the overall market, which was in positive territory, he said.

‘‘They should be doing a lot better. It’s a huge disappointment for the market and for investors and for New Zealanders generally.’’

Fonterra Shareholders’ Council chairman Duncan Coull expressed his ‘‘absolute disappointment’’ with the co-operative’s decisions.

‘‘I can understand the board’s rationale and that it is prudent to protect the balance sheet, but the fact that we find ourselves in this situation is unacceptable,’’ he said.

He questioned how effectively Fonterra was creating long-term value for shareholders.

DairyNZ economist Matt Newman said that for farmers with the average milking herd size of 414, the loss from what they expected to earn was $8000.

In a letter to farmers, Monaghan said the high milk price Fonterra had being paying had put pressure on earnings in a year that was proving difficult due to a payment to French food company Danone and the impairment of its investment in Chinese company Beingmate.

‘‘Our forecast performance right across the business is simply not where we expected it would be,’’ Monaghan wrote.

Fonterra wrote down more than $400 million from its troubled $750m investment in Beingmate earlier this year and recorded a half-year loss of $348m. It was also ordered to pay out $183m to global infant formula maker Danone for the 2012 botulism scare.

Fonterra’s previously announced 25 cents to 30c guidance range has been held, but the co-operative is indicating that it will be at or slightly below this range.

Fonterra units were placed in a trading halt on Thursday after the dairy giant said it may need to revise its earning guidance.

Monaghan said, as indicated in May, a higher milk price had put pressure on Fonterra’s earnings.

‘‘During the process of closing our books for the financial year end, the need for these actions has become clear ... While the numbers are not finalised, our margins were less than we forecasted right across our global ingredients and consumer and food-service businesses.’’

Fonterra chief financial officer Marc Rivers said financial discipline helped it maintain an A- credit rating. ‘‘It’s very important that we maintain that. The board took decisive action to maintain the balance sheet. We shifted 5c from the milk price to buttress earnings and signalled a dividend of 10c,’’ he said.

‘‘By doing that we will be able to come in at, or maybe slightly below, earnings guidance.’’

ASB analyst Nathan Penny said usually the dairy giant announced its final payout forecast in May, and then sometimes revised it but normally the change was about 2c to 3c.

Penny said he expected a downward revision in the new season milk price forecast as well.

‘‘Farmers are in for a double dose of not so good news,’’ he said.

Fonterra’s full-year results will be announced on September 13.

‘‘They should be doing a lot better. It’s a huge disappointment for the market and for investors and for New Zealanders generally.’’ Mark Lister, Craigs Investment Partners