Friday, April 26, 2024

Cautious approval for Fonterra’s plans

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Fonterra’s targeted areas for expenditure and improved margins are sensible in a declining milk environment, Forsyth Barr analysts Chelsea Leadbetter and Matt Montgomerie believe. The FY21 financial results and commentary show that solid progress has been made since the strategy reset but there is still more work ahead to reach earnings targets.
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Fonterra’s targeted areas for expenditure and improved margins are sensible in a declining milk environment, Forsyth Barr analysts Chelsea Leadbetter and Matt Montgomerie believe.

The FY21 financial results and commentary show that solid progress has been made since the strategy reset but there is still more work ahead to reach earnings targets.

For the road ahead Fonterra intends to lift annual capital expenditure from $600 million to nearly $1 billion by 2030.

It wants to reduce carbon emissions and improve water quality, build on the foodservice businesses and accelerate the active living channel.

Forsyth Barr now expects Fonterra’s dividends to grow over the next three years, to 17c, 19c and then 25c in FY24.

These projections are published as Fonterra proposes to cap the shareholders’ fund (FSF), containing about 50m units owned by non-farmer investors.

Since the results and capital structure announcement, FSF units have risen in price by 30c or 8% to around $4.05 presently.

Jarden’s head of research, Arie Dekker, wondered if Fonterra’s ambitious plans for investment are an echo of previous unwise expansions that came undone.

The divestment of Chile and the planned sell-down in Australia made the new plans different in their balance sheets effects and the way shareholders could react, he said.

Proceeds from Chile and Australia would be used to pay down debt and make the special $1b return of capital to shareholders.

“The growth strategy now has clear direction on acceptable gearing levels and expected earnings trajectory.

“With meaningful earnings retention to help fund investment we believe shareholders should use this new accountability to call pause if things do not play out as planned.”

The difference this time is that initial capital expenditure is in areas where Fonterra already has capability – foodservice and active living.

Dekker said the proposed capital structure changes contain few surprises.

The idea of $300m liquidity support in the farmer-only sharemarket should alleviate concerns about a mismatch between sellers and buyers.

The share price itself should be driven by sustained confidence in the new strategy, he said.

Craigs Investment Partners said the tweaked strategy and 2030 key targets were admirable but the FY22 dividend forecast yield of 4.5% looked to be modest.

“We need to see evidence of execution toward 2030 targets before baking them into our forecasts.”

Craigs worked through Fonterra’s commentary on its capital structure review, noting that a buy-back of FSF was unlikely, and the fund would be capped.

On the plus side, that would protect unitholders from the issues in front of farmer-shareholders, being changes to the share standard and restricted market discounts for farmer-only co-operative shares.

The long 15-year exit provision for existing farmers would reduce liquidity in the fund units, because ex-farmers would be more likely to hold an economic exposure to Fonterra through shares.

“Lower demand from farmers for units may also impact pricing.

“We may also see the unitholder base change in composition away from farmers and toward external investors over time.”

Fonterra Co-operative Council chair James Barron said the FY21 results were in line with three-year projections made back in 2019.

They also were evidence that Fonterra could deliver healthy earnings and a strong milk price.

Debt has now significantly reduced and is now at a comfortable level.

Barron also welcomed the greater transparency and the longer-term performance targets, which councillors had been asking for.

The council’s annual report, due out in late October, would have more detailed analysis and commentary and in the meantime farmers should attend one of the regional meetings.

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