Thursday, November 30, 2023

FSF unitholders mollified by profitable performance

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Unitholders congratulate Fonterra senior management on the 2023 results.
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More alignment between the interests of Fonterra farmer-shareholders and unit investors in the Fonterra Shareholders Fund was a theme of the fund’s annual meeting.

Originally yoked in 2012 within the Trading Among Farmers (TAF) scheme, the shares and units are now divorced and going their own way on the share market.

Prices have diverged by just under one dollar, the biggest gap in a decade.

Fonterra’s 1.6 billion supply shares (FCG) are at $2.18 and the 107 million units (FSF) are trading at $3.14.

Unitholders who spoke at the meeting congratulated Fonterra senior management on the 2023 performance and results, which included 50c capital return and 50c full-year dividend.

Total unitholder return since the 2022 annual meeting had been 36.5%, Mary-Jane Daly, chair of the board of the FSF, said.

But one investor challenged Fonterra to buy back the fund, currently valued by the market at $337 million, now that the TAF purpose no longer exists.

Fonterra chair Peter McBride responded with the comment about more alignment between the interests of farmers and investors.

“We have no intention of buying the fund back. In fact, that hasn’t been discussed recently,” he said.

Daly agreed with the alignment comment, saying that senior management now has incentives linked to total shareholder return, being the movements in share price and dividend.

During the past year the FSF price has moved between a high of $3.88 and a low of $2.94.

Despite Fonterra’s active share buy-back scheme to improve the FCG price, the fund is still 6.7% of Fonterra’s total capital, she said.

Re-elected by the meeting as an independent board member, she said FY2023 was a very good year but the performance of FSF since inception has not been satisfactory.

Fonterra’s new flexible shareholding capital structure allows farmers to own shares equivalent to between one-third of their annual milk supply and four times.

McBride renamed 65% of the capital “discretionary shares” alongside the 7% contained within the FSF.

The remaining 28% he termed “compliance shares”.

The discretionary shares, tradeable only among farmers, overhang the market, especially while dairy farmers want to reduce discretionary spending.

They have little money to make off-farm investments, even in their own co-operative notwithstanding its much-improved performance.

Another FSF unitholder argued that Fonterra’s current earnings guidance for FY2024 at 45c-60c is too conservative.

“Your payments for milk have fallen, along with world freight rates, and you have asked us to look at 45c compared with 80c last year,” he said.

Fonterra chief executive Miles Hurrell said the guidance is not conservative, as that is against share market rules.

“We are forecasting the cheese and protein stream returns to come closer to the milk price.

“At the same time, we expect higher returns from consumer and foodservice, as higher margins persist.”

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