An analyst is recommending investors to sell units in the Fonterra Shareholders Fund because of the lack of visibility in short-term earnings highlighted in the dairy giant’s first-half results.
Earlier this week, Fonterra reported a drop of more than 50 percent in first-half net profit to $217 million because high raw materials costs are squeezing its profit margins.
Craigs Investment Partners analyst Arie Dekker says he sees limited prospects of significant earnings coming from Fonterra’s consumer products business, New Zealand Milk Products.
Fonterra is withholding $1 billion from farmers through the farmgate milk price so it can continue paying dividends and avoid having to borrow to pay farmers.
Despite the amount withheld, the payout, including the dividend, is forecast at a record $8.75 per kilo of milk solids.
Mr Dekker says the weak outlook, with continuing high input costs and Fonterra’s limited ability to raise prices of the finished goods, doesn’t suggest a significant contribution in the second half. He notes 70 percent of last year’s operating earnings came in Fonterra’s first half.
Mr Dekker says that although Fonterra confirmed its strategy for improving its flexibility, including fast-tracking its investment in stainless steel capacity, details were limited. He says he’s also concerned about Fonterra’s access to capital with farmers being given options to put off investment.
He says while withholding money from the farmgate milk price supports earnings and the balance sheet, such intervention isn’t ideal.
Mr Dekker has a $5.64 12-month target price for the units.
Units in the Fonterra Shareholders Fund, which anyone can own, fell 2 cents to $6.07 in morning trading while Fonterra shares, which only farmers can own, fell 5 cents to $6.
Source: RadioNZ
