Fonterra is New Zealand's biggest business. Photo / Michael Craig
Fonterra’s integration of its Australian and New Zealand brands businesses could be a run-up to the dairy export leader taking another look at strategic options for these mature assets, top Jarden analyst Arie Dekker hopes.
Commenting on the company’s strong interim financial result, Dekker said there was “plenty of potential for capital management”.
Jarden awaited with interest to hear the company’s thoughts on the options that additional balance sheet strength brought to investment and capital management - “we think Australia’s future remains an open question too”.
Last year Dekker challenged Fonterra to spell out why it had decided to retain the Australian business given it had swallowed a lot of capital but delivered “very poor results” for many years.
Thursday’s interim results showed the after-tax profit of the Australian manufacturing and consumer products business fell 70 per cent on the corresponding six months last year to $21 million from $69m. Fonterra announced the merger of the business with its New Zealand brands operation in February.
In a note to clients, Dekker said Fonterra’s balance sheet strength gave it options but it was playing its cards close to its chest.
“One of the fallouts from capital structure changes (last year) has been a poorly performing Fonterra Cooperative Group (farmer-owned shares) share price ... and we continue to call out the potential for value-accretive buyback activity.
“The important thing we continue to watch is that (Fonterra) maintains discipline in its allocation of capital and that it can provide comfort on discretionary investment against competing uses of capital like a buyback.
“One of those discretionary areas of activity is Australia.”
Fonterra had made a brief reference to the merger in the results announcement “and taking a glass half-full approach, we see integration and setting up for scale and efficiencies as a potential precursor to another look at the strategic options for these mature assets”, Dekker said.
“This could release meaningful capital and pave the way for capital return.”
Fonterra returned $800m or 50c a share to shareholders last year after the sale of its Chile business Soprole for $1.3 billion.
Fonterra is a farmer-owned co-operative. Only farmers can own shares in the company but it offers outside investors dividend-carrying units in those shares through the listed Fonterra Shareholders’ Fund (FSF).
“We remain positive so long as FSF continues to demonstrate a focus in the core business,” Dekker said.
“Limiting the amount of capital required in the co-op should continue to deliver good outcomes for FSF and investors and we continue to take a constructive approach to FSF on an investment case that remains attractively positioned. We do continue to emphasise the challenges associated with assessing the outlook for earnings and the capital intensity needed to deliver that.”
Meanwhile, John Stevenson, chairman of farmer watchdog the Fonterra Co-operative Council, said the interim results were “very pleasing”.
“It’s good to see a continuation of the run of solid results. All the metrics are really positive, particularly continuing debt reduction and also, the stability of the milk price.”
The interim 15c per share dividend was also welcome and would provide extra cash flow for farmers under pressure from rising interest rates.
On-farm cost rises had plateaued but some farmers were reporting that Fonterra’s mid-point milk price forecast of $7.80 per kilogram of milksolids for this season was only break-even, Stevenson said.
Particularly welcome was Fonterra’s announcement of a 30c/kg increase in the advance milk payment to farmers, he said. The rate for milk produced in March and paid for in April had risen from $6.25/kg to $6.55/kg.
“The difference is the timing of payments. It is cash that we would have been paid later in the season. We are now receiving it earlier.”
Farmers had noted Fonterra’s warning of headwinds with pressure on margins and price relativities in the second half of the 2024 financial year.
“This is not the time to trade in and trade up the ute,” Stevenson said.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.