Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

Patience needed for Fonterra's streamlining, says FNZC

Patience needed for Fonterra's streamlining, says FNZC's Dekker


By Paul McBeth

March 21 (BusinessDesk) - Farmers and investors will need to be patient with Fonterra Cooperative Group's overhaul of its business, which sometime-critic First NZ Capital analyst Arie Dekker says is moving in the right direction.

The cooperative's board is working through a review of the business which has seen several assets put on the market to help cut the milk processor's debt levels, and has signalled more divestments are coming.

Chair John Monaghan yesterday described the review as pre-empting a fundamental change of the cooperative, with the top priority in achieving top-dollar from New Zealand's value-add products. The focus will be on the sustainability and provenance throughout Fonterra's supply chain, qualities that command a premium in markets such as China where food safety is top-of-mind for consumers.

FNZC analyst Dekker told clients in a note today that the turnaround will take some time and patience is required by holders of Fonterra Shareholders' Funds units.

"There are many strategic issues for FSF to address across the right sizing of the asset portfolio, debt and equity capital structure, and the ability to remain competitive for milk supply in NZ given its significant embedded stainless steel capacity and desire to invest further in value-add processing," he said.

"FSF must be realistic about its capability and 'DNA' through this process having seen significant value destruction as it has invested away from its core business without the capital structure to necessarily withstand bumps along the way."

Once Fonterra figures out the shape of a leaner version of itself, Dekker said it will be in a position to deal with longer-term problems around capital structure and how to position itself in the market.

"We expect FSF to work out what it looks like before it turns to capital structure considerations in detail and were encouraged by management’s acknowledgement that these issues will need to be progressed and worked on in the lead up to, and beyond, the FY19 result," he said.

"Being clear on what it means to remain competitive for milk supply in NZ over the longer term should be a key outcome of all this work."

Dekker has been forthright in his criticism of Fonterra's inability to convert capital investment into earnings, and at one stage lowered his rating on the Fonterra Shareholders' Fund to 'underperform'.

FNZC is restricted in rating the stock at the moment given its investment banking arm is running the sale of Tip-Top.

Dekker isn't optimistic that Fonterra will pay a final dividend and is assuming it won't, citing the uncertain earnings outlook for the rest of the financial year and the company's need to shore up its balance sheet.

"While this is a not a good situation for farmers, a robust outlook for the milk price in FY19 should help support this decision if the board finds themselves in that position," he said.

The Fonterra Shareholders' Fund was launched in 2012, giving outside investors exposure to the milk processor's earnings stream, while preserving the farmer-shareholders' control of the cooperative.

The fund was launched in tandem with Fonterra's Trading Among Farmers scheme, as a means to reduce the redemption risk when farmers either reduce their milk production or exit the cooperative. Fonterra was saddled with a $742 million redemption bill when milk production dropped in the 2007/08 drought.

Some farmers were reluctant to let the fund go ahead, seeing it as a threat to their control of the cooperative and potentially undermining the farmgate milk price. That prompted Fonterra to reduce the size of the fund as a proportion of its stock.

At the time of the offer, it was envisaged that the fund's units on issue would amount to 7-12 percent of Fonterra's shares.

Some $77 million of units were redeemed in the six months ended Jan. 31, while $71 million of new units were issued. After a $40 million negative revaluation of the liability to unitholders, the fund's net assets attributable to unitholders was $524 million. In the prior period, $122 million of new units were issued and $51 million redeemed. After an $18 million gain on the revaluation, net assets were $852 million.

The fund had 110.6 million units on issue at Jan. 31, or 6.9 percent of Fonterra's shares, down from 137.4 million, or 8.5 percent of Fonterra's stock, a year earlier.

John Shewan, chair of the fund's manager, said in its first-half report that he views the strategic review and attempts to deal with Fonterra's performance as a positive step, albeit one that won't happen overnight.

"The commitment in the interim report to take difficult decisions and to a culture of accountability and performance right across the organisation is welcome," he said.

The units recently traded at $4.25, having dropped 8.6 percent so far this year. They hit a record low $4.17 on Feb. 28.

Fonterra chief financial officer Marc Rivers told reporters yesterday that the fund is still fit for purpose, and that the focus on improving performance will be key in turning that around.

"The route that we have to improve comes back to performance - that's the focus of the strategic review," he said. "If we do that then the share price will be reflective."

(BusinessDesk)

© Scoop Media

 
 
 
Business Headlines | Sci-Tech Headlines

 

Maritime NZ: NZ Joins Global Initiative Keeping Ports Open And Freight Moving

New Zealand has joined an international port authorities’ global initiative for safe and efficient movement of goods and shipping during the COVID-19 crisis. World-wide, 56 port authorities have agreed how they will work together facilitating maritime ... More>>

ALSO:

National: National Backs Businesses With $10k JobStart

National will provide a $10,000 cash payment to businesses that hire additional staff as part of our commitment to keeping New Zealanders in jobs, National Party Leader Todd Muller and Finance spokesperson Paul Goldsmith have announced. Our JobStart ... More>>

ALSO:

DIY Law: Government Exempts Some Home Improvements From Costly Consents

Homeowners, builders and DIYers will soon have an easier time making basic home improvements as the Government scraps the need for consents for low-risk building work such as sleep-outs, sheds and carports – allowing the construction sector ... More>>

ALSO:

Media Awards: The New Zealand Herald Named Newspaper Of The Year, Website Of The Year At Voyager Media Awards

The New Zealand Herald has been labelled a “powerhouse news operation” as it claims the two biggest prizes – Newspaper of the Year and Website of the Year – along with many individual awards at the 2020 Voyager Media Awards Website of the ... More>>

ALSO:

ASB Bank: ASB Takes The Lead Again With New Low Home Loan Interest Rate

ASB has moved again to support its customers, cutting a number of home loan rates, including the two-year special rate to a new low of 2.69% p.a. Craig Sims, ASB executive general manager Retail Banking says the reduced rate will be welcome news for many ... More>>

ALSO:

Nathan Hoturoa Gray: The Problems With Testing And Case Statistics For Covid-19

To begin to understand disease transmission in a country requires adequate testing of your population with properly vetted, accurate tests. As the world struggles to find what 'adequate percentage' of the population is necessary, (estimates predict ... More>>

ALSO:

RNZ: Fletcher Building To Lay Off 1000 Staff In New Zealand

The construction company will cut around 10 percent of its workforce as it struggles with the fallout from Covid-19. More>>

ALSO:

Can Pay, Won't Pay: Cashflow Moves Urged

Government Ministers are asking significant private enterprises to adopt prompt payment practices in line with the state sector, as a way to improve cashflow for small businesses. More>>

ALSO:

Gordon Campbell: On Why We Should Legally Protect The Right To Work From Home

For understandable reasons, the media messaging around Level Two has been all about “freedom” and “celebration”, but this is not necessarily going to be a universal experience. When it comes to workplace relations, Level Two is just as likely to ... More>>

ALSO:



Auckland Airport: Thousands Of Kiwis Travelling For Queen’s Birthday Weekend


Confidence in domestic travel is beginning to steadily ramp up, with thousands of Kiwis travelling within New Zealand for Queen’s Birthday.
Nearly 400 flights will be operating to and from Auckland Airport over the long weekend... More>>

ALSO:

Science Media Centre: Understanding 5G Concerns – Expert Q&A


Recent attacks on cell phone towers have brought concerns over the rollout of 5G technology into sharp relief.
While scientific research has consistently shown that the technology does not adversely affect human health, public concerns about its impact have spread around the world, fueled in part by growing misinformation online. The SMC asked experts to comment... More>>

ALSO:


Trade: Record Monthly Surplus As Imports Dive

Imports in April 2020 had their biggest fall since October 2009, resulting in a monthly trade surplus of $1.3 billion, Stats NZ said today. “This is the largest monthly trade surplus on record and the annual goods trade deficit is the lowest ... More>>

ALSO:


Media Blues: Stuff Chief Executive Buys Company For $1

Stuff chief executive Sinead Boucher has purchased Stuff from its Australian owners Nine Entertainment for $1.
The chief executive was returning the company to New Zealand ownership, with the sale is expected to be completed by 31 May.
"Our plan is to transition the ownership of Stuff to give staff a direct stake in the business as shareholders," Boucher said in a statement.... More>>

ALSO:

RNZ: Bar Reopening Night 'much, Much Quieter'

Pubs and bars are reporting a sluggish first day back after the lockdown, with the fear of going out, or perhaps the joy of staying home, thought to be a reason for the low numbers. More>>

ALSO:

Stats NZ: New Zealand’s Population Passes 5 Million

New Zealand's resident population provisionally reached 5 million in March 2020, Stats NZ said today. More>>

NIWA: Seven Weeks Of Clearing The Air Provides Huge Benefits: Scientist

Seven weeks of lockdown has provided evidence of how pollution can vanish overnight with benefits for the environment and individuals, says NIWA air quality scientist Dr Ian Longley. Dr Longley has been monitoring air quality in Auckland, Wellington ... More>>

ALSO:

Government: Milestone In Cash Flow Support To SMEs

A significant package of tax reforms will be pushed through all stages in Parliament today to throw a cash flow lifeline to small businesses. More>>

ALSO: