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Synlait and Fonterra to report diverging earnings

Monday 18th March 2019

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Two dairy companies will report first-half results this week but they will be like “canned success versus udder confusion,” as Craigs Investment Partners analyst Adrian Allbon puts it in his results preview.

Both dairy companies have the same milky input but vastly different outcomes, Allbon says.

He's expecting “solid profit growth” of about 5 percent to $43 million from Synlait Milk which is continuing to invest in producing new revenue streams.

Synlait's key strategic challenge is finding a way to diversify away from being so dependent on A2 Milk. Synlait is the manufacturer of A2 Platinum canned infant formula.

Allbon expects Synlait's infant formula production rose about 16 percent to 19,500 metric tonnes, based on his analysis of port data.

But for dairy giant Fonterra, which processes more than 80 percent of New Zealand's milk, it is “too difficult to isolate an accurate first-half estimate, which says a lot about the current state of the business,” Allbon says.

“That being said, we expect over-gearing to be a central issue with the potential for an S&P credit rating downgrade to follow,” he says.

He'll also be looking for progress on assets sales – Tip Top icecream is up for sale – and plans to slim down overhead costs.

“A key concern for us against this backdrop is the material full-year downgrade recently issued most likely reflects stronger competition emerging across a range of Fonterra core businesses.”

Fonterra downgraded its earnings in late February and cancelled its first-half dividend, blaming rising milk prices.

Fonterra now expects earnings of 15-25 cents per share, down from a previous forecast of 25-35 cents per share.

The downgrade implies annual earnings of between $242-403 million in the year ending July, compared to the earlier projection of $403-564 million.

At the same time, it upgraded its 2018/19 farmgate milk price forecast to its 10,000 farmer suppliers and shareholders to $6.30-6.60 per kilo of milk solids, from $6-6.30 previously.

After the downgrade, international ratings agency Fitch Ratings put Fonterra Cooperative Group on notice over its credit rating, saying its asset sale programme will be critical in getting debt under control.

Allbon says he thinks Fonterra will have to complete asset sales of at least $800 million in order to reach the top end of its target gearing range.

The cooperative confirmed the appointment of Miles Hurrell as its chief executive in early March – he had been doing the job in an acting capacity since August last year after the departure of former CEO Theo Spierings.

Hurrell has been charged with restructuring Fonterra after last year's net loss of $196 million after a $232 million payment to Danone over the 2013 contamination scare and a $439 million writedown of the $750 million investment in Chinese company Beingmate.

(BusinessDesk)

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