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Fonterra's credit rating safe but Shareholders' Council labels payout cut 'unacceptable'

Friday 10th August 2018

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S&P Global Ratings said there is no immediate impact on its rating on Fonterra Cooperative Group from the group's lower farmgate milk price and dividend guidance for the year ended July 31, issued this morning.

However, the Fonterra Shareholders' Council expressed deep disappointment, saying "the fact that we find ourselves in this situation is unacceptable" and took the unusual step of questioning the cooperative's value creation record at a time when a new chief executive is being sought and the chairmanship has unexpectedly changed.

Earlier, New Zealand's largest business affirmed normalised earnings per share guidance of 25-30 cents, implying earnings of $403 million to $484 million, but indicated it's likely to be at or slightly below this range, and anticipates no dividends beyond the 10 cents per share interim payment made in April. 

Fonterra also trimmed its 2017/18 forecast farmgate milk price to $6.70 per kilogram of milk solids from $6.75/kgMS.  It made no mention of the forecast for the current season but ASB Senior rural economist Nathan Penny said "unfortunately for farmers, a second forecast cut is likely to follow later this month." He expects Fonterra to cut its $7.00/kgMS 2018/19 forecast to near ASB's forecast of $6.50/kgMS. 

The world's biggest dairy exporter cited a 105 million euros settlement with Danone and a $405 million impairment charge on Beingmate for needing to strengthen the balance sheet, and noted skinnier margins from its global ingredients and consumer and foodservice businesses.

S&P said today's announcement indicates the group "is willing to actively manage debt levels." It also said that its "stable outlook reflects our view that Fonterra's operating environment remains fundamentally sound and that more consistent milk prices should naturally stabilise the group's credit metrics."

However, it does expect Fonterra's debt to earnings before interest, taxes, depreciation and amortisation will be "materially outside our downward threshold of 4 times for fiscal 2018" and said the rating will come under immediate downward rating pressure "unless we believe the group's credit metrics will rapidly improve over fiscal 2019."

Duncan Coull, chairman of the Fonterra Shareholders’ Council, said he can "understand the board’s rationale and that it is prudent to protect the balance sheet, but the fact that we find ourselves in this situation is unacceptable." 

According to Coull, the council "acknowledges that part of governance is managing risk, another key responsibility is to create long term value for shareholders. Given today’s announcement the question is ‘how effectively is this being done?’," he said. 

Meanwhile, Fonterra Shareholders' Fund units, which gives outside investors exposure to Fonterra Cooperative Group, fell as the announcement added to scepticism about the efficacy of the cooperative's structure.

The units dropped 2.4 percent to $4.99, adding to a 20 percent slide so far this year, and fell as low as $4.95, a level not seen since September 2015 when Fonterra was hit by a slump in global dairy prices and offered interest-free loans to its farmer shareholders to tide them through the downturn.

(BusinessDesk)

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