Fonterra: Trims payout Puts Tip Top up for sale
Six years ago this week, when the first trade of Fonterra shares on the NZX went through at $6.66, a reportedly delighted thenchief executive Theo Spierings joked “666 means something to some people but I hope it doesn’t for our shares”.
Now $8 million man Spierings has gone (not soon enough for many), Fonterra’s share price of $4.70 is no one’s idea of a joke, and after mixed reaction to the big dairy company’s latest market announcements as it tries to soothe concerns about its stretched balance sheet and debt, it seems the devil is indeed lurking, ensuring no one is happy.
Fonterra’s iconic icecream maker Tip Top is officially on the block. No surprises there.
Inherited through the industry mega-merger that created Fonterra in 2001 under special enabling Labour Party legislation, Tip Top was picked as the first asset to go when Fonterra recently declared a $196m net annual loss, the first in its history, and debt of $6.2 billion.
Tip Top, founded 70 years ago, is as Kiwi as jandals. Maybe it launched the international modelling career of Rachel Hunter.
Public reaction to confirmation of the much-tipped sale was swift — an online Save Tip Top petition.
That was predictable. Not so was the reaction of the country’s biggest dairy farmer, Fonterra shareholder Colin Armer.
The former Fonterra director said asset sales while the board was still promising dividends was a no-go.
His influence suggests he was speaking for many shareholders.
Shareholder frustration at Fonterra’s financial performance spurred an unprecedented rout at recent director elections — but apparently that anger doesn’t extend to a desire to sell assets willy-nilly.
“Is it good governance practice when you have a stressed balance sheet to be selling assets instead of withholding dividends?” asked Armer, repeating a question he asked at the embattled co-operative’s annual meeting last month.
Fonterra’s stretched balance sheet is partly attributed to having no firm earnings retentions policy.
It has been paying out most of its operating earnings to farmers.
Maybe because its balance sheet is under the national and market spotlight, Fonterra seemed to make an extra effort in its December 6 market update to be more detailed than usual about its first quarter performance, while announcing a very predictable cut in its milk price forecast.
Disappointingly for Fonterra bosses, the market reception to the performances of its various divisions was “soft, soft and soft”.
Which brings us again to the Tip Top icecream sale.
Fonterra has expressed a desire to keep the company in New Zealand.
Craigs Investment Partners’ principal Mark Lister isn’t taking bets on that. He thinks there will be big investor and investment company interest in a sale.
That could be a trade sale but there’s also the possibility of Tip Top being offered in an IPO.
That said, there’s bound to be resistance in the Fonterra shareholder base to the company giving away its fragile claim to being a value-added business if it sells Tip Top.
Which brings us to a line in Fonterra’s sand.
It needs to tell us — asap — if its brave review will lead it to pledge to continue being a highly efficient and profitable producer, manufacturer and exporter of top quality commodity products for the world’s food and nutrient manufacturers — or a wanna-be Nestle without the funds.
The drought of new listings on the NZX looks set to last a little longer, with a pre-Christmas debut for artificial intelligence company Arria NLG now off the table.
The company, which specialises in artificial intelligence that can read data and convert it into language, had hoped to list in the fourth quarter of this year.
“It appears we are not going to be able to pull everything together for Arria before Christmas, so the NZX listing will now be done in the first quarter of 2019,” CM Partners principal Tim Preston said in an email to the Herald.
“There has been a lot involved with moving the company from the UK to New Zealand and co-ordinating everything such as audits across three different jurisdictions,” he said.
Arria, which de-listed from London’s Alternative Investment Market in 2016, plans to debut in New Zealand as a so-called “compliance” listing, which entails the listing and quotation of existing securities without raising fresh capital.
The company, which has historical links to the now de-listed
Diligent Board Member Services ,is also looking at new technology as a source of funding, such as distributed ledger technologies associated with blockchain, and digital security tokens used in crowdfunding.
Arria NLG — for natural language generation — is headed up by Sharon Daniels, a co-founder and former executive director of Diligent, which delisted in 2016 after it was bought by
Insight Venture Partners.
Arria has about around 300 shareholders, many of them New Zealanders and many of them former Diligent shareholders.
CM Partners is acting as the capital markets advisor and NZX sponsor for the listing. The NZX has seen just one new equity addition this year — QEX Logistics’ compliance listing in February.
Shades of grey
If October wasn’t exactly a Black October on the markets, it was certainly 50 shades of grey.
Big falls were measured on global markets and in New Zealand, the NZX was down more than 5 per cent for the month.
Milford Asset Management senior analyst Frances Sweetman said October was a very difficult month. November was not flash either.
“For us, the driver is very clear — we’ve got very high valuations, monetary policy is becoming less accommodative as the US raises interest rates, and then investors are becoming increasingly concerned that the global economy is starting to slow.”
So, is grey the new black for the markets?
“It’s hard to see a very strong performance from the sharemarket going forward. But it’s difficult to have the confidence to say we have a lot more Octobers on the horizon because there are two things playing off here,” Sweetman says.
“On the one hand, our local interest rates are still low and are due to stay low.”
Economic growth is still good and company earnings are still robust.
“But, on the other hand, valuations are still high and it looks like the outlook is becoming less attractive. So, as those two things play off against each other, we’re bound to see more volatility. It’s not a case of the sharemarkets falling for no reason.”
Looking ahead, investors have had a very good couple of years and the next few years of returns are probably not going to be as good. But that’s no cause for alarm, Sweetman says, provided people invest according to their risk profile and that they can take a medium-term view.
Fletcher Building’s share price plummet last month, after revelations of another unexpected profit downgrade, has some wondering if it is now a potential takeover target.
Fletcher shares sunk to $4.60 on Thursday last week — two days after its disastrous annual meeting and downgrade announcement.
That’s the lowest the price the shares have closed at since July 2004 — three years after Fletcher Building was split off from Fletcher Challenge.
Daniel Kieser, managing director of ShareClarity, says Fletcher Building’s share price is now trading beneath its book value.
“At some point it could become an acquisition target.”
Kieser suggests potential buyers could include state enterprises like China Communications Construction, China State Construction or China National Building Materials.
“They each have operations in New Zealand and may want more exposure to the infrastructure and housing markets.”
And they have deep pockets with China State Construction having $60 billion cash on its balance sheet and China Communications Construction with $8b cash.
Kieser said other potential buyers may include construction companies looking to diversify their interests like Hochtief which owns CIMIC in Australia or VINCI, owners of HEB Construction in New Zealand; or global private equity firms like Bain Capital, Hellman & Friedman or the Carlyle Group who have invested in undervalued/turnaround Australian companies in the past.
Given Fletcher’s down and out situation it’s hard to know if shareholders would welcome a bidder as a white knight or see it as opportunistic.
Building consent data out this week showed continued strength in domestic construction activity, yet Fletcher’s share price has struggled.
“Fletcher Building’s share price is currently below where it was in the depths of the GFC,” NZ Funds senior portfolio manager Josh Wilson said.
“But building consents — a key driver of Fletcher’s business — are more than twice as high as then and show no signs of slowing,” he said.
Wilson said the whole sector — comprising Steel & Tube, Metro Performance Glass, Methven, Cavalier — has failed to capture the benefit of the building boom for shareholders.
Fletcher Building shares closed on $4.73 yesterday.
Tip Top could take the credit for launching the international modelling career of Kiwi Rachel Hunter.
New building consent data shows continued strength in domestic construction activity, yet Fletcher’s share price has struggled.