Broker surprised by poor Fonterra half-year result

Fonterra is predicted to have strong second-half trading after booking a $348 million first-half loss. Photo / File

Fonterra has attracted a minor downgrade from brokers after disclosing a $405million asset value writedown against its stake in Chinese infant formula distributor Beingmate this week.

In its half-year report, which booked an overall $348million loss, Fonterra also booked a $183million damages payment to French food giant Danone.

Forsyth Barr broker Damian Foster said the first-half result was "disappointing".

Fonterra reported normalised after-tax profit of $248million, down 34%, which reflected weak gross margins, down 2% to 17%, and operating expenses up 3%.

"The result was significantly worse than we expected with the co-op unable to pass through input costs as readily as we expected, citing increased competition," Mr Foster said.

Forsyth Barr yesterday lowered its earnings per share expectations 7%, to the bottom end of the underlying guidance range, lowered its unit target price 2% to $6.05, but left its recommendation unchanged at "neutral".

However, Mr Foster said Fonterra's outlook commentary suggested a strong second-half trading to come.

"[Fonterra's] unchanged guidance suggests a very strong second-half 2018 trading, albeit we remain cautious, targeting the bottom end of the range, given the inherent commodity price volatility," Mr Foster said.

Mr Foster said the "neutral" rating was being maintained instead of "positive" because of the "conflicts" between payments for Fonterra Shareholder Fund unit holders and dairy farmer shareholders.

The unit holders receive cashflow only from dividends, which this week was cut from last year's 20c to 10c, while the dairy farmer shareholders gain from the Farmgate milk price, whose forecast went up this week from $6.40 to $6.55 per kg of milk solids.

Mr Foster noted some positives. The global dairy demand had continued to strengthen and Fonterra's Consumer & Foodservice markets remained attractive.

"Strategically, Fonterra has a clear goal of shifting commodity sales into higher value products," he said.

He said planning execution was required for material value creation and Fonterra's next chief executive, to replace outgoing Theo Spierings, would have the challenge of continuing from what had been a volatile earnings progression, since Fonterra listed in 2012.