Wednesday, July 6, 2022

Farmers nervously await TAF launch

The launch of Trading Among Farmers is rapidly approaching and Hugh Stringleman checks the pulse of those likely to be involved.

NOT THEIR THING: Federated Farmers dairy section chair Willy Leferink says most dairy farmers are not natural share traders and are nervous what TAF will involve.

Fonterra’s dairy farmers are nervously awaiting the launch of Trading Among Farmers in about six weeks to see where the share price will go, according to Federated Farmers dairy section chair Willy Leferink.

“They are nervous that someone or something outside of farming will be setting the share price,” he said.

“Most farmers are not natural share traders, whereas investors will be more active traders.”

Leferink thought many farmers will only come to grips with the share trading platform (Fonterra Share Market) purely to satisfy their share standard needs.

As for placing the economic rights of shares into the Fonterra Shareholders’ Fund (FSF), most dairy farmers had not given that a lot of thought during a busy and challenging spring.

“I have no feeling for how many will want to place some shares in the fund,” he said.

Fonterra deputy general counsel Mike Cronin said TAF was designed to be a deep and liquid market with a well-discovered share price.

After the prospectus was published at the end of this month, the bidding process by intending investors will in effect set the issue price for units in the fund.

Because the fund, although much smaller, is geared into the shareholders’ market, the consensus of the bid prices will become Fonterra’s share price when the button is pushed on TAF, expected in late November.

Before that, Fonterra must be satisfied of around $500 million of interest, of both shares supplied to the fund and of investor participation.

While that is only 8% of Fonterra’s $6 billion share capital, this initial public offering (IPO) will be the largest this year in both New Zealand and Australia.

In numerous recent small meetings throughout the dairying provinces, shareholders have been encouraged to think of how TAF will work for them, Cronin said.

“We have put a range of practical scenarios in front of them, ranging from passive market participation to very active.”

It has been emphasised that there is no need to panic, because every farm is now fully shared until December 2013.

Nevertheless the prospectus period is the initial sizable opportunity for each dairy farmer to place up to one-third of total wet and dry shares into the fund, after which it is likely to be closed off for a time.

The timing of Fonterra’s IPO is “brilliant” according to independent sharebroker Chris Lee, Kapiti Coast.

“The world and particularly NZ are going to extremely low interest rates for many years and so 5-6% returns will be attractive.

“There will also be potential for the shares to increase in value as the market learns to put multiples and values on Fonterra which are closer to its big competitors, like Nestle.”

Potential investors will need to be convinced that Fonterra units are as safe as bank deposits, but they will certainly pay more than deposits.

Lee expects that most of the initial $500 million will be offered in NZ and that most of it will be taken up.

However, he thought preferencing “friends of the Fonterra family” like retired farmers and sharemilkers will be hard to do in practice.

Asked to look back over the history of failed dairy industry offers in this country, Lee said the one that really got away (to the Chinese company Bright Dairy) was Synlait which should have been better supported at home.

Others like Dairy Equity, NZ Farming Systems Uruguay and Pastoral Dairy Investments had suffered from inadequate marketing or flaws in execution, in Lee’s opinion.

Another researcher for a major broking house, who did not want to be named, expected that the prospectus and various pieces of published research will go a long way to clearing up any lack of understanding about the complicated nature of the Fonterra IPO.

The building of the $500 million book had to be done in two ways – farmers supplying their shares into the fund and investor interest creating the demand.

“The supply side is uncertain, but if farmers don’t commit then Fonterra can issue shares and raise new equity.

“I don’t think there will be any trouble with the demand side, with plenty of excitement already among retail investors, local institutions and offshore.”

The broker said Fonterra was well-regarded as a stable business with good growth prospects and that 5% yield after tax would be attractive.

He thought farmers stand to benefit the most when the pegged share price is set free, as they participate in capital gain, retain their voting rights and can buy back any shares placed in the fund on demand.

Cronin said farmers are developing an understanding of share adjustments on demand, rather than only at the end of the season.

If growing milk production goes over the number of supply shares held, the surplus will be discounted 5c/kg on milk price and not be eligible for dividend.

However, both a buffer of dry shares and the three-year rolling average will work in farmers’ favour, he said.

Farmers have also been told not to worry about “noise” from the market as it anticipates a sizeable IPO in a flat news period.

It is in everyone’s interests that investors and institutions come up to speed quickly on NZ, dairying and Fonterra.

“So we have to do the market education, as our structure is not easy to work with from cold,” Cronin said.

For example, the Australian Financial Review recently referred to the “listing” of Fonterra creating excitement among fund managers, a group of whom had been taken by Goldman Sachs to Malaysia for briefing and familiarisation.

“The question for investors over the coming weeks is how to value Fonterra Shareholders Fund units. It seems there is no simple answer.”

However, the paper then managed to estimate an implied share price of $6.78, working from share prices and multiples of other branded dairy product “names” like Danone and Kraft.

“The problem is the units in the fund only mirror Fonterra shares. Investors may demand a discount for not being able to have a say in how the company is run or being able to take a substantial stake in the company,” the paper said.

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