Fonterra's earnings set to surge after a steady 2022

Fonterra is set to report a steady result on Thursday thanks to strong demand for dairy worldwide. Photo / Supplied

Fonterra is expected to report steady earnings for the 2022 financial year this week but the attention is already turning to the current year, which is shaping up to be one of its most profitable yet.

The dairy co-operative has already said it expects its 2022 earnings per share to come in towards the top end of its 25c to 35c range, compared with last year's result of 34.1c per share.

In an earnings update issued in August, chief executive Miles Hurrell said good progress had been made over the past 12 months.

"Looking ahead, we see a positive outlook for dairy," Hurrell said then.

The co-op - New Zealand's biggest exporter - looks to have weathered the impact of high milk prices, which create a drag on its earnings because milk is its biggest input cost.

Demand for dairy has been strong worldwide while supply, here and in all the other major dairy-producing countries, has been constrained.

That supply/demand dynamic has driven domestic farmgate milk prices to record levels - well north of $9 a kg of milksolids.

Ari Dekker, head of institutional research at Jarden, expects a steady result and one that would be a welcome change from three or four years ago, when Fonterra struggled with underperforming overseas investments and high debt.

"Given the current milk price environment, it's going to be a pretty good outcome," Dekker said.

The key driver will be Fonterra's ingredients business.

"The stream returns have been pretty positive and you are seeing the benefits of them being more focused in their strategy," he said.

Fonterra chief executive Miles Hurrell. Photo / NZ Herald

Analysts expect the key talking points from Thursday's result will be around the future of Fonterra's large Chilean business, Soprole, which the company has put up for sale.

Fonterra Australia's business, which has previously been flagged as a possible candidate for a sell-down, is also likely to feature.

Civil unrest in Sri Lanka, a small but significant part of Fonterra's business, will also loom large.

Fonterra has already said that it continued operations "within manageable and specific credit limits" in Sri Lanka while the island state suffered a prolonged economic and political crisis.

Sri Lanka weighed on its Apac (Asia Pacific) result over the third quarter, with Apac's normalised earnings before interest and tax falling by 43 per cent to $177 million.

Turning to the current year, Fonterra said early this month that it had revised its forecast earnings guidance to 45 to 60 cents per share, up from a previous forecast of 30 to 45 cents per share.

"The key thing about that guidance is that they are sitting there with milk prices remaining at levels as high as they have ever been, yet their earnings look like they are going to be very strong as well," Dekker said.

"I guess that's the protein story and the benefits that they are generating from their revenue streams at the moment," he said.

If Fonterra's earnings forecast for the current year to July 2023 comes to pass, it will be one of the co-op's best ever results - comparable to the bumper 2010/11 result of 60 cents a share.

"This sustained period of favourable pricing relativities between our protein and cheese portfolios and whole milk powder is the main driver for the increase in the 2023 earnings guidance range being announced today," Fonterra said in its latest update.

Forsyth Barr is a bit more circumspect about Fonterra's prospects.

Commenting on the 2023 upgrade, Forsyth Barr analysts said: "While a strong result, given the non-recurring and volatile nature of product pricing movements, this is unlikely to be sustained in future periods."

The broker said Fonterra remained committed to its long-term earnings and returns targets.

"Solid progress continues to be made, but we currently take a more conservative stance until we see ongoing signs of execution."