Fonterra fund units drop 10 pc on dividend cut

TIM HUNTER
Last updated 11:58 11/12/2013

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Units in the NZX-listed Fonterra Shareholders Fund have dropped 10 per cent this morning to as low as $5.48 after the co-operative said it would cut its dividend from 32c to 10c.

The Shareholders Fund gives its investors the right to receive an income stream equal to dividends paid by Fonterra.

The unit price fall brings the fund back to its $5.50 offer price when it was floated in November 2012.

By late afternoon, units had recovered to $5.78, down 5 per cent.

Analyst Arie Dekker of Craigs Investment Partners, who downgraded his rating on the fund to a 'sell' three days ago, said high prices for milk powder were putting pressure on Fonterra's earnings, but ''it's having a larger impact than I expected.''

''You're talking a very significant cut to ebit [earnings before interest and tax] expectations.''

This morning Fonterra said it was revising its forecast 2014 earnings to $500-$600 million, a significant decrease from its 2013 ebit of $937m.

The profit warning was due to strong demand and high prices for milk powder which are the baseline for Fonterra's milk payout.

With about 30 per cent of Fonterra's production going to non-milk powder products such as cheese and casein, the current high milk price feeds through to losses on a significant part of the co-op's milk supplies.

While the situation favours farmers with a record forecast payout of $8.30 a kg of milk solids, the lower profits have forced Fonterra to cut the dividend and restrain further rises in the milk payout.

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