Analysts fret over Fonterra
Analysts mining Fonterra's 2013 annual result tomorrow will have the botulism scare and profit volatility on their minds, but farmers enjoying their best milk production in years are unlikely to dwell on negatives.
New Zealand's biggest company, a farmer-owned co-operative with publicly listed units, warned in July that its earnings for the 2013 year ending July 31 would be lower than forecast in the Fonterra Shareholders Fund prospectus, issued in November.
It said this year's drought contributed to a 64 per cent rise in whole milk powder prices on its online sales platform, Global Dairy Trade, since early in the year, which had had a significant impact on the margins of its manufacturing division, NZ Milk Products.
While analysts are expecting some negative tones tomorrow given what is likely to be a weak second half, continuing challenges in the Australian business and projected fallout in year 2014 from Fonterra's false alarm over botulism contamination of baby foods, these are unlikely to dampen the spirits of Fonterra's farmers who have had the best spring many can remember and are anticipating a record 2014 milk price of $7.80.
Fonterra Shareholders Council chairman Ian Brown, a Waikato farmer, said farmers were in "very, very good spirits" and "making a lot of milk".
Milk production in the North Island is thought to be running at least 5 per cent ahead of the same time last year as a result of bumper grass growth and good cow condition.
"I've never seen cows milk as well in more than 30 years of farming," Brown said.
But analysts are less ebullient.
Forsyth Barr in a research note said Fonterra's July warning suggested the drought had had a material impact on performance.
"We believe this principally reflects losses on DIRA milk [raw milk Fonterra is obliged to sell to small companies] and product mix issues.
"We expect NZMP was barely profitable through 2H13."
Forsyth Barr expected Fonterra to report underlying net profit after tax of $718 million, up 18 per cent against the 2012 result, and a gross final dividend of 16c per share.
The key hit to margins from the advance of global dairy prices over the past nine months would be in the first half of the 2014 year but some margin pressure was expected to show in second-half 2013, said the note, which recommended "sell".
"While margin pressure should be associated with brands, transfer pricing may mean the hit at this stage in the cycle is in NZMP."
The sustained downturn in the Australian business was expected to hit performance again, with a 29 per cent decline anticipated in 2013 year earnings before interest and tax in the ANZ division. "Also be wary of writedowns in the Australian brands business as the co-op executes its brand consolidation strategy," said the note.
Craigs Investment Partners head of research Mark Lister said he would want to know if, and how, the botulism scare could affect the company in sales, lost production and additional costs, and about the potential for compensation demands from affected companies.
While international dairy prices were holding firm and industry suggests the forecast milk price could go higher, analysts would want to know how Fonterra expected the rebound in the New Zealand dollar to affect its outlook.
Fonterra units closed at $7.20. Lister said he was surprised how the unit price had shrugged off the issues around the botulism scare, which sparked two Government inquiries.
- © Fairfax NZ News