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Fonterra unit investors kick unit values after interim result - Tim Fulton - Fairfax

Investors are punishing Fonterra for a disaappointing balance sheet and dividend payments to farmers, a Canterbury-based share advisor says.

The value of Fonterra's listed investment units has dropped up to 20 per cent since the co-op's interim result two months ago.

The sharemarket "wasn't too happy" with Fonterra's interim financial result on March 25 and the feeling had contributed to the unit price in the Fonterra Shareholders Fund falling from about $6 per unit to $4.80, Hamilton Hindin Green authorised advisor Grant Davies said.

The unit value had slid "sideways" around $6 since its NZX listing but only once before had it fallen like this, he said. The unit value has risen in the past two days to 4.95 on Friday.

Fonterra is set to update its current-season Farmgate Milk Price and give its opening price for the new milking year on May 28.

Davies said unit traders had been taking note of Fonterra's estimated dividend in the past few weeks. Dividend is the added-value return that the co-op gives its shareholders on top of payments for milk collected at the farmgate.

Fonterra's dividend range for the current financial year was 20-30c per share. Davies said it was doubtful Fonterra would pay above 20c given the year it was having.

The fluctuating price of added-value items like cheese and casein had made it harder for Fonterra to maximise its dividend to milk-producing shareholders and maximise the top-up payment to those farmers, he said.

About 30 per cent of Fonterra's products were classed as added-value, although that proportion was decreasing as Fonterra moved to produce more milk powder.

"Clearly the (investor) market wasn't too happy that market had been trending downwards for some time now and that's obviously crimping their margins a little bit as well."

The unusually low value of the Fonterra units showed that non-farmers unit holders wouldn't necessarily reap better dividend returns when the co-op's farmgate milk price was low, Davies said.

One of Fonterra's most important value-indicators was the ratio of whole milk powder in its production line compared to cheese and casein, he said.

The value of whole milk largely set the price of the farmgate milk priced paid to farmers "and if key prices fluctuate one way or the other, that will have a big impact on Fonterra's margins".

Toward the end of 2013, for instance, Fonterra had to cut its farmgate milk prices more than its price manual stipulated. This was mainly because the price of cheese and casein had dropped sharply, potentially creating major cashflow problems for the co-op.

The directors over-ruled their manual to keep cash in hand, Davies said.

Goldman Sachs said in a March 26 equity research report that Fonterra had made good progress on branded sales - up 22 per cent year on year - but it was disappointed by the co-op's expenses and lower dividend forecast, which had previously ranged up to 35c per share.

All of Fonterra's businesses had performed below expectations, including the Australia New Zealand (ANZ) division which went into operating loss for the half year.

The Australasian and Asia Middle East regions had been hit by a $29m of revaluation losses for farm livestock as a result of lower milk prices, as well as higher milk prices squeezing margins in the Latin America zone (LATAM), GoldmanSachs said.

The ingredients business was hit by higher-priced milk powder stocks sold at lower prices after the rapid fall in milk prices, the firm's report said.

In a forecast for the second half of the 2015/15 financial year GoldmanSachs "still see operational headwinds in ANZ and LATAM from competition and high milk prices. China brand growth also remains to be proven."

The firm's researchers said they were already concerned about Fonterra's "ability to invest in growth" given its net gearing of 50 per cent.

GoldmanSachs compared Fonterra to a "peer group average" of comparable consumer companies in the Asia Pacific. It rated the co-op lower for potential growth, return on capital and multiples. The equity firm gave Fonterra fund units a "neutral" rating as a stock to retain.

Fonterra declined to comment as it was not able to comment on the performance of its units outside NZX disclosure statements.

- Stuff

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