Thursday, August 18, 2022

Fonterra’s falling share price gives concern

Fonterra has brought forward support for liquidity in the Fonterra Shareholders’ Market (FSM) for supply shares while it waits for the Government to approve the Flexible Shareholding capital restructure.

In so doing it acknowledged concern among farmer-shareholders that the value of their shares has nearly halved in the past year.

The wealth destruction on farm balance sheets has come since Fonterra suspended the connection between the Fonterra Cooperative Group (FCG) shares and the Fonterra Shareholders’ Fund (FSF) units before consulting on restructuring.

On May 5 last year FCG shares were $4.56, about the nominal value when Fonterra launched market valuation of shares in 2012 as part of Trading Among Farmers and the initial public offering of FSF units.

FCG shares are now $2.46 and FSF units a little higher at $2.87.

Collectively, the market capitalisations of FCG and FSF have fallen from $7.85 billion to $4.27b, which is 45% capital loss.

Some $860 million of the value reduction has occurred during the past two months in the lead up to most farmer’s end of financial year on May 31.

The FSM is in the doldrums awaiting substantial changes, market liquidity is very low and share and unit values are languishing. 

“Liquidity in the FSM has been low, and we know there is concern about the decline in our share price over recent weeks and the impact this is having on your balance sheets,” chair Peter McBride said in an email to all farmers.

He then made a passing reference to the earnings per share guidance of 25-35c, implying that the share price did not reflect the good earnings outlook or the company’s plans to pass back $1b to shareholders (about 60c a share unfranked) by 2024.

The company’s intended remedy is to flag additional support to liquidity in the FSM by arrangements with one or more market-makers.

“While those arrangements are still being worked on, Fonterra will be providing additional financial support to the current registered volume provider to more actively support liquidity in the FSM.”

But that was the only immediate move announced in McBride’s letter – the rest being intentions for more flexibility in the share standard when Dairy Industry Restructuring Act (DIRA) amendments are passed.

“Although compliance remains on hold, you can still buy or sell Fonterra shares if you wish to do so within one to two times your three-season average milk supply,” he said.

Daily transactions of FCG shares during the past nine months have been under 200,000, which is about the size of the average-sized farm current share standard.

In previous years around the times of share compliance dates, transaction volumes have been much higher.

Under the proposed new share standard of three to one kilogram of milksolids, about two-thirds of all FCG shares would become effectively “dry”.

The company believes these will be valuable for their earnings potential but the market restriction to farmers-only will make ensuring market liquidity a big challenge.

Cooperative Council chair James Barron said the workings of the FSM in the interim are matters for the company and its board and he would not make comment on the McBride email.

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