Monday 13th August 2018
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Forsyth Barr has cut its dividend expectations for Fonterra Cooperative Group for the next two years after the dairy giant last week abandoned plans to pay a final dividend for the 2018 financial year, citing weaker margins and the need to strengthen its balance sheet.
On Friday, Fonterra said it no longer expected to pay a final 2018 dividend beyond the 10 cents per share interim payment made in April, having previously indicated a final payment of 5-to-10 cents per share. 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 its balance sheet, and noted skinnier margins from its global ingredients and consumer and foodservice businesses.
In a report published today, Forsyth Barr senior equity analyst Chelsea Leadbetter cut her expectation for Fonterra's 2019 dividend by 11.4 percent to 26.3 cents, and her 2020 expectation by 9.3 percent to 29.2 cents. She also reduced her expectations for 2018 normalised net profit by 12.4 percent to $396 million.
"We have downgraded our near-term earnings expectations underpinned by lower margin assumptions across the board for the co-op’s segments," Leadbetter said in her report titled 'More Spilt Milk'.
"We materially lower our dividend forecasts to reflect near-term indications from Fonterra, but also given our forecast gearing is ahead of target levels."
In May, Fonterra said that its gearing ratio was expected to move above its 40-to-45 percent target range in the 2018 financial year before returning back within the range in the 2019 financial year.
Forsyth Barr's Leadbetter said she now expects gearing to be "materially higher", and forecast a gearing ratio of 48.7 percent in 2018, up from 45.3 percent in 2017. She expects it to remain above the target range for the next two years, at 47.4 percent in 2019 and 46.4 percent in 2020.
Leadbetter noted Fonterra's guidance last week was negative for both shareholders and farmers, given the dairy company had lowered its earnings per share expectations, cut the final dividend and reduced its farmgate milk price for the 2017/18 season to $6.70 per kilogram of milk solids from its previous forecast of $6.75/kgMS, in a departure from the value calculated under the milk price manual. That lowered the cash payout for farmers to $6.80/kgMS from $6.90-6.95/kgMS.
"There is a disconnect between farmer shareholder and investor unitholder desires," she said. "Farmers prefer the maximisation of the farmgate milk price, while unitholders prefer a lower farmgate milk price and higher dividend."
The conflict between unitholders and shareholders is unlikely to be repaired in the medium term, she said.
Units in the Fonterra Shareholders' Fund, which give investors exposure to Fonterra's earnings, edged up 0.4 percent to $5 and have dropped 22 percent so far this year. Analysts polled by Reuters rate the stock a 'sell', according to the average of four ratings.
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