Friday, July 8, 2022

Fonterra’s earnings trim temporary

The expectation of falling short of a key prospectus forecast has prompted Fonterra to make a relatively small and inconsequential update of its anticipated 2012-13 financial year (FY13) results.

The impact of drought, rapidly rising whole milk powder (WMP) prices and accelerated reshaping of the Australian business arm caused the revision, chief executive Theo Spierings said.

The bottom-line earnings before interest and tax (EBIT) forecast of $1.0798 billion in the Fonterra Shareholders Fund (FSF) prospectus last year was recast to $1b, he said.

SMALL UPDATE: The impact of drought, rapidly rising whole milk powder prices and accelerated reshaping of the Australian business arm caused the revision, chief executive Theo Spierings says.

However, the important deliverables for FY13 remain unchanged – milk price at $5.80/kg milksolids, cash payout to farmers at $6.12/kg, earnings per share at 45-50c, and dividend at 32c per supply share or FSF unit.

Despite the EBIT revision, directors have enough room within the 45-50c earnings range to hold the dividend forecast at 32c, possibly because of lower tax or a trim for any dividend retention.

Farmers and investors have already been paid 16c interim dividend for FY13 and Spierings’ announcement last week does not change the market expectation that another 16c will follow in the September 25 full-year results announcement.

Unit and share prices on the NZX exchange fell as much as 28c after the news last Thursday, but recovered when investors realised Fonterra’s result for FY13 (ending July 31) remained strong and the outlook for the next financial year was bright.

Just how bright will be revealed after a board meeting this week, when the current-season milk price and dividend expectation will be forecast.

Westpac Bank economists have stuck their necks out with a $7.40/kg prediction, saying Fonterra would move this week from its current $7/kg to possibly even more than $7.40.

“This is shaping up as a bumper dairy season. World prices remain very high, while growing conditions have been generally very good since the drought broke. The icing on the cake is a lower currency,” Westpac said.

NZX Agrifax dairy analyst Susan Kilsby is tipping $7.35/kg for the milk price.

Any market nervousness in the meantime stems more from the impact of rapidly rising world dairy commodity prices on the NZ Milk Products (NZMP) divisional earnings, especially the value-add component, and the ongoing difficulties in Australia.

The widespread drought in most NZ dairying districts earlier this year upset the supply and demand balance and caused world price volatility.

It also carved up to 3c/kg off the Fonterra milk price when the giant co-operative was required to sell proportionately more of its dwindling milk stream to competitors under the DIRA legislation.

NZMP’s first-half earnings were excellent, up 65% to $422 million EBIT, but the second-half boost in commodity prices meant some cost of goods in the first-half report were over-stated and NZMP’s second-half earnings would suffer.

However, a large part of the latest full-year EBIT downwards revision results from trouble in Australia, where Fonterra has been required to match main competitor Murray Goulburn co-operative on milk payout but has been squeezed on processing margins for dairy ingredients and consumer-ready products.

“The drought has contributed to a 64% rise in WMP prices since early 2013 and this has had a temporary, but significant, negative impact on NZMP’s margins,” Spierings said.

“This is shaping up as a bumper dairy season. World prices remain very high, while growing conditions have been generally very good since the drought broke.  The icing on the cake is a lower currency.”

Westpac

“A recovery plan is being implemented in Australia, but it is in its early stages and will not counteract the impact on earnings of intense competition and the accelerated reshaping of our business.

“The reshape programme has resulted in a number of additional write-offs.”

Investors and advisers will be eagerly awaiting a full briefing on the Australian restructuring at the September 25 FY13 results presentation.

Craig’s Investment Partners analyst for Fonterra, Arie Dekker, said the Australian problems were potentially the biggest drag on FY13 earnings.

“Last week’s EBIT trim is also a little wake-up call to FSF investors about the climate effects on NZ dairying,” he said.

“The input costs for value-add products have shot up, so NZMP’s premium prospects are constrained.”

Federated Farmers took another poke at presumed ill-informed investors in FSF units, who pushed the price to $8 in May.

“(They) may not have understood how it all works,” dairy section vice-chairman Andrew Hoggard said.

“Increases in commodity prices actually mean tighter margins as the inputs Fonterra uses to make its own products also rise in price.”

But the rising tide lifts all boats, and Fonterra directors will likely forecast an increased dividend for FY14 later this week.

Related story: Fonterra 2013 earnings to lag forecasts over drought, Australian competition

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