Overseas investors who see Fonterra as a proxy for New Zealand Inc agriculture have pumped life back into the dairy heavyweight’s unit price after it deflated on the back of a generally flat 2013 result.
The units in Fonterra farmer-owned shares again proved hard to keep down yesterday, closing at $7.10 after sinking below $7 when New Zealand’s biggest company reported a dip in earnings and revenue and flat sales in a year marred by drought in the second half.
Earnings disappointed at $1 billion, despite the company’s warning in July that it would miss the unit prospectus forecast of $1.097b. However, net profit was up 18 per cent on 2012, at $736 million.
Directors held the forecast full-year dividend of 32 cents a share.
The result held few surprises for market watchers. But they came just a day after Fonterra announced a 50c rise in its 2014 forecast milk price to farmers, taking their likely milk payment to a towering record of $8.30 per kilogram of milksolids.
Fonterra had a superb first half in 2013 for both production and performance, but drought struck in January. This resulted in a 9 per cent dip in milk production and threatened hardship for Fonterra farmers.
The company responded by using operating cashflows to raise the amounts it paid in advance to farmers through the rest of the 2013 season.
Chief executive Theo Spierings said the combination of drought and costs involved in reshaping the underperforming Australian business resulted in the 3 per cent dip in earnings before interest and tax.
The drought caused unprecedented volatility, reflected in a 64 per cent spike in global whole-milk powder prices from January 2 to April 16, which in turn lifted the price Fonterra had to pay its farmers for milk, eroding the first-half gains.
«All in all, it was a bit of a weak result,» Craigs Investment Partners head of research Mark Lister said. «It’s been a while since we have seen earnings growth from Fonterra.»
He noted Fonterra kept its dividend steady, but «not because things have been completely steady». Farmers and unit investors receive the dividend.
The effort to hold the dividend at the forecast 32c yesterday raised questions that farmers were propping up a dividend to market investors.
«That is the thing we have been worried about from the start,» Lister said. «Who do they answer to? Farmers or investors? It’s an interesting beast and we need to apply a little caution.
«It’s not like an Auckland Airport or a Sky TV, which have one job and one job alone, and that’s to generate returns for shareholders.
«Fonterra also has to pay the highest possible milk price to its farmers. It’s these little niggly issues and dynamics that will become clearer.»
Research analyst Oyvinn Rimer of Harbour Asset Management said Fonterra had achieved some good things, such as cost cutting, rationalising its brand portfolio and apparently pursuing its higher-value products strategy.
He noted the two largest shareholders in the Fonterra Shareholder Fund are Australian institutions, and there seemed to be strong demand for shares in food-producing firms globally.
Source: Stuff
