Fonterra’s Consumer sale plan gets a tick from S&P Global, units near 7-year high

Fonterra's sale plans has the thumbs up from S&P Global. Photo / NZME

Ratings agency S&P Global says Fonterra’s robust balance sheet and strong core operations will help offset effects of the planned sale of its consumer products business.

The consumer division contributed about 16% of Fonterra’s operating profit in the first half to January 31, the agency noted in a report.

Fonterra is rated by S&P as “A minus” with a stable outlook.

“While a planned divestment will slim the co-operative’s size and earnings diversity, we anticipate the co-operative would recalibrate its capital structure in line with our expectation for the ‘A-’ rating,” S&P said.

Fonterra’s exploration of divestment options comes at a time of balance sheet strength, it said.

“Our base case forecasts the co-operative’s debt-to-earnings before interest, tax, depreciation and amortisation (ebitda) ratio will be about 2.0 times in fiscal 2025, well below our 4.0 times threshold for a downgrade,” S&P said.

“We believe Fonterra will use flexibility in its credit ratios to maintain competitiveness in New Zealand milk collection and to enhance on-farm cash flow for farmer shareholders.

“A recent increase in its target dividend to 60%-80% of reported net profit after tax, excluding any abnormal gains (up from 40%-60%), and the trial of an adjusted advance rate payment schedule are evidence of this strategy.

“Additionally, we expect Fonterra may consider a sizeable capital return from the proceeds of any full or partial sale of the consumer business,” S&P said.

The agency expects the group to maintain its disciplined approach to capital management.

Earnings from Fonterra’s core ingredients and food services divisions remained strong.

“We expect second-half earnings to be underpinned by a combination of: Positive domestic demand and supply dynamics in China; A continued shift in product mix to higher-margin products; Strong New Zealand milk collection volumes; and favourable exchange rates.”

In addition, Fonterra’s predominant exposure to customers in Asia and Europe, the Middle East, and Africa, along with its ability to redirect volumes, should help it navigate uncertainties in global trade, it said.

Fonterra’s units have been among the NZX’s strongest performers over the last few years, trading today at $5.79 - close to a seven-year high.

The co-op’s farmer-only shares last traded at - $4.97 - also near five-year highs.

Fonterra on Thursday reported a first-half net profit of $729 million, up 8% on the previous comparable period.

The co-op increased its interim dividend to a fully imputed 22 cents from 15c a year earlier, and maintained the mid-point of its milk price forecast at $10/kg of milk solids.

Fonterra is sticking with its 55-75 cents per share ($885m to $1.2 billion) earnings forecast for 2025.

Brokers Forsyth Barr said the key catalyst for Fonterra going forward would be the sale of its Consumer business under the Mainland banner.

“We remain of the view a trade sale is most likely and see capital proceeds of $2.5 billion ($1.56 per share) to $3.0 billion ($1.87 per share), but acknowledge uncertainty persists,” Forsyth Barr senior analyst Matt Montgomerie said in a research note.

He said the half-year period was all about a strong second quarter for Fonterra’s Ingredients business.

After a wave of news over the last two weeks, limited new updates were provided on the Mainland Group sale, Montgomerie noted.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.