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Fonterra Shareholders' Fund Units

Friday 23rd January 2015

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Fonterra Shareholders’ Fund Unit (FSF.NZ) is a unit trust established to invest in the economic rights of shares in Fonterra Co-operative Group Limited. The unit holder can receive dividends but does not have any voting rights or any control over governance of Fonterra. Fonterra Co-operative Group Limited is owned by 10,600 New Zealand farmers and is the world’s largest global milk processor and dairy exporter.  Fonterra is ranked fourth (by dairy product turnover) with a turnover of US$15.7 billion – behind Nestlé at US$25.9 billion, Danone at US$19.5 billion and Lactalis at US$18.8 billion. The fund units were sold in an initial public offering in November 2012 at $5.50 per unit.

Australia and New Zealand (ANZ) encompasses three separate consumer and out-of-home foodservices businesses, and a dairy processing and manufacturing business that collects approximately 18% of Australia’s milk supply. ANZ also includes RD1 (New Zealand’s largest rural supplies retailer). 

Total sales volume of 832,000 MT was down six per cent on the previous year. This was in part due to the sale of the Norco liquid distribution business last year. Oceania normalised EBIT was 78 per cent lower than the prior year at $31 million. Both the New Zealand and Australian markets have been challenging for Fonterra’s consumer businesses this year, with higher input costs difficult to recover in very competitive environments. Normalised EBIT in Australia was $37 million lower than last year and Normalised EBIT in New Zealand business fell 61 per cent, as a result of margin squeeze in the consumer brands business.

Volume growth of 12 per cent to 419,000 MT was driven primarily by excellent performance across China. Foodservice across Asia was up 11 per cent with continued demand for the chef-led approach, organic market growth in Indonesia and further market penetration in bakery chains in Malaysia and China. Normalised EBIT for the year was $91 million, 56 per cent lower than last year and 53 per cent lower on a constant currency basis. Across the Asia region, significantly higher input costs as a result of the high dairy commodity prices have been the key driver of the decrease in earnings, along with the challenging market conditions experienced in Sri Lanka in the first half of the year. Construction of the new packing and blending facility is underway in West Java and will be operational by the end of March 2015. Once complete, the plant will have the capacity to blend and pack 12,000 MT of advanced and base nutrition milk powders annually, which is the equivalent of 87,000 packs of Anlene™, Anmum™ and Anchor™ Boneeto every day.

Latin America grew volumes by three per cent to 387,000 MT, driven mainly by the Soprole business in Chile. Consumer volumes in Soprole were up two per cent, driven by growth in liquid milk, mature cheese and powdered milk, while milk powder sales to the Government Health Programme also increased. Business across Latin America was also impacted by higher input costs,with the Farmgate Milk Price up on average by 13 per cent. Normalised EBIT decreased 19 per cent to $111 million. Excluding the impact of the strong New Zealand dollar, earnings fell 12 per cent. The key driver of lower normalized EBIT was Soprole, where earnings fell 40 per cent, or 31 per cent in constant currency.

 

Storage and distribution expenses were also higher, as the business transitioned to a new centralised distribution centre, creating some duplication over the transition period. The change means that Soprole is well positioned to improve service levels and drive efficiencies in this area as the business grows.

Fonterra slashed its forecast farmgate milk price for the 2014/2015 season by 60 cents per kilogram of milk solids to $4.70/kgMS but left the dividend range unchanged at 25-35 cents per share. The reduced milk price forecast translates to a drop of more than $6 billion in dairy industry income, or 2.7 percent of gross domestic product, compared to last season’s record farmgate milk payout of $8.40/kgMS. The lower forecast was at the weaker end of weak expectations for the payout and the board has said it will revise the dividend when the interim results are announced next April. Dividends are typically based on 65 percent to 75 percent of the adjusted net profit after tax but the board takes into consideration near-term earnings projections and investment needs, and the average paid out over the past three years. The dividend was 10 cents per share in the last season, 32 cents in 2013 and 2012, and 30 cents in 2011.

DISCLAIMER: To the extent that any of the content above constitutes advice, it is general advice that has been prepared without reference to investor’s objectives, financial situation or needs. Before acting on any advice, investors should consider the appropriateness of the advice and IRG recommend that investors should obtain appropriate financial, legal and taxation advice before making any financial investment decision. The report is based on information compiled from public information and private research. IRG have completed the report on a best endeavours basis and do not accept any liability of loss or damage. IRG suggest that clients use this as part of a decision making process and check key data before making any investment decisions.
Employees may have an interest in the securities discussed in this report.



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