Fonterra needs to spell out why it has decided to retain an Australian business which has swallowed a lot of capital but delivered “very poor results” for many years, says top Jarden analyst Arie Dekker.
In all the hoopla over the dairy co-operative’s strong financial result this week, the future of the “non-core” Australian business, and Fonterra’s reticence over the reasons it decided to keep it after a review last year, was a continuing niggle for Jarden’s managing director, head of institutional research.
Dekker said a divestment of the business “done well” could deliver another substantial capital return to Fonterra’s farmer-shareholder owners.
New Zealand’s biggest business returned $800 million or 50c a share to farmers last month after completing the sale of its South American consumer business Soprole for $1.3 billion.
Dekker’s analysis of the business from FY2013-2020 showed Fonterra Australia generated operating cashflows of just A$150m ($162m) (excluding interest cashflows) on core net capital expenditure of A$550m ($595m) over this period.
“There was meaningful investment over FY17-19 in particular, with that likely contributing to the improved performance from FY20.
“I think the rationale they gave when they made the announcement (to retain) last year was quite brief. We are disappointed by the lack of visibility into the options canvassed and transparency on what (Fonterra) looks to achieve holding Australia given our concerns on its historical performance. Questions remained unanswered,” Dekker said.
He suggested, as he has in the past, that any future review of the Australian operation include Fonterra’s New Zealand consumer business, which this week reported an impairment following a loss of $164m in the group’s consumer business.
After-tax profit in the channel decreased $137m on the previous year, mainly due to impairments in Fonterra Brands NZ ($121m) and Asia brands ($101m).
In a report to clients after the Fonterra result, which saw its FY23 reported after-tax profit lift 170 per cent to $1.6b, Jarden said “current high input prices aside, (Fonterra) has a poor track record in consumer with impairments across the group ongoing”.
Fonterra chief executive Miles Hurrell reiterated to the Herald this week that the Australian business was being retained. “No change. It’s performing well and we are pleased with that,” he said.
When Fonterra announced at the FY22 results it was staying in Australia, it said: “We’ve looked at a number of options ... and have decided that it’s in the co-op’s best interest to maintain full ownership.
“Australia plays an important role in our consumer strategy with a number of common and complementary brands and products and as a destination for our New Zealand milk solids. The business is going well and it will play a key role in helping us get to our 2030 strategic targets.”
But Dekker told the Herald Fonterra needed to be “much clearer” about why it was holding on to the Australian business, which comprises eight milk manufacturing sites and exports dairy ingredients, as well as producing consumer products whose brands include Perfect Italiano, Mainland, Western Star and Bega.
Dekker could “totally accept” if the timing hadn’t been right to divest it at the time of the review, due to market conditions or the position of the business, “but I do think they have to come back and better address the basis on which they are going to stay in a business which clearly is not core”.
“If they make a really convincing case for it and we can continue to monitor its performance ... but what I’m concerned about is they’ve just said the business is a key part of the consumer strategy going forward, and performance is improving. I don’t think that’s enough.”
The Jarden client report said the FY21 and FY22 accounts showed Fonterra Australia incorporated “some assets outside the Australian operation”.
Revenue over the past 10 years had been flat “with no meaningful growth being achieved when we adjust out the contribution from those overseas interests in FY21 and FY22″.
It was a similar picture with gross profit, Jarden’s analysis said.
“We have to be cautious about interpreting FY21-FY22 cashflow given we cannot separate out the overseas interests ... (we expect they were a positive contributor). Notwithstanding that, in the cashflows we observe for FY13-FY20, we see sufficient basis to ask questions about what (Fonterra) expects to achieve through its ongoing ownership of these assets, and what its review on the medium-term capital investment requirements are,” Jarden said.
Of the wider Fonterra FY23 financial result, Dekker said the company’s balance sheet “is in extremely strong health now”.
“The reason for that is a period where investment has been lower, it’s divested a bunch of businesses dividends have been a bit lower (previously) and (product) stream returns have generated a lot of cash.
“They find themselves with a really strong balance sheet and they’ve made a lot of positive changes.
“But the one still open for me is Australia.”
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.