Fonterra's share price too rich for some
Do you think Fonterra's listed unit price is too high?
Fonterra's listed unit price, which has rebounded despite a dip in 2013 earnings and a warning of approaching headwinds, is too rich for some sharemarket watchers.
The Fonterra Shareholders Fund units were $7.12 this morning in light trading after sinking below $7 yesterday morning on the back of a dip in earnings and revenue attributed to the drought and commodity-price volatility.
Forsyth Barr's research division in a note today kept its "sell" recommendation, and lowered its target price from $6.60 to $6.20.
Craigs Investment Partners head of research Mark Lister said yesterday's result was on the weak side, and he was surprised at the unit price holding up. He said he was a seller.
Lister attributed the sustained price to overseas investors who saw Fonterra as an investment proxy for NZ Inc agriculture.
Fonterra reported a 2013 result in line with its lower earnings guidance of July. Profit was up 18 per cent at $736 million.
Forsyth Barr said the prospect of an adverse product mix and the rising cost of milk supply had tempered its 2014 earnings forecasts.
Ebit forecast was cut by 24 per cent for 2014 and high single digits in following years, the note said.
Fonterra's core domestic milk-processing business was barely profitable in the second half of 2013, with adverse product mix and regulated milk losses significantly eroding profitability and offsetting cost savings and price premiums generated by Fonterra's Global Dairy Trade sales.
"The current shape of global dairy prices mean the division is exposed to further material negative product mix in FY14," it said.
"The rising milk payout is good for farmers. In contrast, it's not good for unit holders. We expect COGS (milk) to rise 20-25 per cent in the consumer and food-service operations that are sourced from NZ Milk Products.
"Price increases will help but will not fully pass on the higher costs.
"We expect significant margin pressure to result, particularly in the [Asia/Africa/Middle East] division where our Ebit forecast declines 56 per cent against pcp [previous corresponding period] in FY14E." Forsyth Barr believed the unit price was holding up because Fonterra is "extremely complex".
The capital market, and farmers who own the shares in Fonterra, were on a huge learning curve, the firm said.
"Its reaction to news flow on Fonterra is not as rational as we would ordinarily expect," it said.
"Over time we expect a more informed market to appropriately price Fonterra."
A second reason was that the investment decisions of farmers were very different to the decisions of investors.
Investors only benefited from a dividend stream, while farmers needed to own milk supply shares in Fonterra to meet the company's share standard.
"Therefore the farmers' collective view on valuation may be different to that of external investors," it said.
- © Fairfax NZ News