ASB economist Chris Tennent-Brown said it was rare that Fonterra could report strong earnings along with a high milk price, which often acts as a brake on earnings.
The bank has previously estimated $10/kg milk price could add about $4 billion to the economy compared with last season.
Fonterra chief executive Miles Hurrell said the upgraded earnings outlook and the milk price was a great outcome.
“This upgrade reflects the underlying strength of our core Ingredients business and the resilience in our Consumer channel, which is contributing to a robust result for businesses in the divestment perimeter,” Hurrell said.
“Our Consumer channel has shown good volume and margin growth while recovering the higher farmgate milk price this season,” he said.
The co-op will release its six-month results on March 20 and will confirm its interim dividend on that date.
Fonterra’s dividend policy is to pay out 60-80% of full-year earnings, with up to 50% of the full-year dividend to be paid at the interim period.
Separately, Fonterra said it had started roadshow meetings with potential investor groups as part of the divestment process for its global Consumer and associated businesses.
The meetings are a step towards a potential initial public offering (IPO).
The entity would be known as Mainland Group if Fonterra proceeds with an IPO.
An information pack included indicative pro-forma historical financial information up to 2024 and reflected a more refined view of the components of the Mainland Group business compared to previous financial disclosures by Fonterra.
The pack shows Fonterra had decided to retain a manufacturing facility in Saudi Arabia and its Greater China consumer business.
“These refinements have the effect of reallocating a larger portion of earnings into Fonterra’s core business,” the co-op said.
Forsyth Barr senior analyst Matt Montgomerie said the key issue from the earnings upgrade was how much of it could be attributable to structural changes and how much to one-offs.
He noted milk prices have in the past affected earnings because milk is the co-op’s biggest input cost.
“Normally there is quite a lag - margins get squeezed and Fonterra has to bear the higher milk price, whereas it doesn’t feel like that’s the case now,” he said.
“It’s a very rare situation where earnings and dividends are high, along with a high milk price for farmers.
“If you look at the spreads between the break-even milk price, when you take into account the dividend, then it looks like it’s going to be a record high year in terms of on-farm returns,” he said.
Meanwhile, roadshow documents put the 2024 earnings before interest and tax for the “in scope” assets for sale at $200m down compared with $282m in materials released at last September’s financial result.
As a result, the implied capital in the business is probably $2.7b versus $3.4b previously, Mongomerie said.
“What it does do is lower the possible proceeds in terms of capital that could be received,” he said.
While roadshow documents looked to have been prepared with an IPO in mind, Montomerie said they did not eliminate the possibility of a trade sale, which he saw as the more likely option.
Fonterra’s NZX-listed units, which give investors access to the co-op’s dividends, rallied on news of the upgrade.
The farmer-only Fonterra shares also firmed.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
