First NZ Capital cuts its FSF unit rating
AUCKLAND: First NZ Capital (FNZC) has cut its rating on Fonterra Shareholders’ Fund (FSF) units as the dairy cooperative’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 Cooperative Group’s earnings, to ‘‘underperform’’ from neutral, and sliced 17% from his target price to $5.09. The units recently rose 0.9% to $5.38.
The research house said its key concerns about Fonterra were the inconsistency between the growth strategy and capital structure which created an inability to raise equity from farmers or retain earnings; poor track record in adding value from what investment had been made; and an inability to move earnings over 10 years. On top of that, earnings are inherently volatile and neither Fonterra nor the market can predict them.
With ‘‘FSF consistently investing $800 millionplus 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 des pite a cautious overall bias,’’ said Mr Dekker in a note to clients.
He said there was also a range of mounting concerns including what appeared to be a negative bias in ingredients earnings; evidence that valueadd 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 which could see FSF continue to lose share to new independent capacity; and mounting 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 10to15 cents per share from a previous forecast of 25to30 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 and while this has generally been slow, ‘‘increasingly the investment proposition in FSF looks like it might be undermining FSF’s ability to retain critical mass in New Zealand milk supply — something that is particularly worrying for FSF if milk supply growth is harder to come by.’’