Wednesday, April 24, 2024

Fonterra’s bounty has begun to normalise

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Analysts say golden run of super-normal profits is ending.
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Equities analysts have praised Fonterra for its continued profitability as disclosed in the interim results for FY2024.

But what they call a golden run of super-normal profits is ending as stream returns return to historical relativities and the tail winds for Consumer and Foodservice margins moderate.

The second half of FY24 will see normalisation of trading and contractions of margins but sharemarket investors and farmer-shareholders should stay positive.

“The impact of strong results on the balance sheet is very positive,” Jarden’s head of research, Arie Dekker, said.

“Changes in the capital structure, in more flexibility for sharing up, position Fonterra well for milk, especially as a key competitor is struggling at present.”

After his reference to Synlait, Dekker noted that the co-operative said farmers are interested in joining Fonterra and this is positive for the manufacturing capacity.

He again raised the possibility that Fonterra could sell its Australian plants and businesses, now coupled with Fonterra Brands NZ, and make another big capital return to shareholders.

Analysts for three brokerages have forecast net profit after tax this financial year of around $1 billion, falling to between $750 million and $850m in the two following financial years.

These projections expressed in earnings per share (EPS) are 58-64c in FY24, 45-53c in FY25 and 45-55c in FY26.

After applying Fonterra’s dividend policy of paying out 40-60% of earnings, the consensus dividend forecasts are around 50c this year and 28-32c in the two following years.

Forsyth Barr analysts Matt Montgomerie and Benjamin Crozier have increased their expectations towards the top end of Fonterra’s dividend policy range.

Jarden and Craigs Investment Partners have both increased their target prices for Fonterra Shareholders Fund (FSF) units by 6% to $4.05 and $3.92 respectively, with overweight ratings.

Forsyth Barr does not provide target prices.

Craigs analysts said that following a spectacular run over the past 18 months, Fonterra’s bumper results are now behind the company.

“While Fonterra now lacks near-term catalysts, and may report a down year in FY25, we think the units remain good value versus their agricultural peers.”

The Forsyth Barr duo said they were gaining confidence in Fonterra’s execution of its 2021 strategy.

Operating expenditure has been controlled well in an inflationary environment.

“It continues to pursue and invest for cost efficiencies in its operations, which underpins our modest EPS upgrades.”

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