Downgrade in Fonterra's earnings 'was inevitable'
Fonterra's earnings downgrade for the 2013 year marks the start of a learning curve about investing in the dairy export industry for sharemarket punters.
As New Zealand's biggest company proved yesterday in announcing that its earnings for the year ending July 31 will be lower than forecast in the Fonterra Shareholders Fund prospectus issued late last year, strong international milk prices and robust payouts to farmers don't automatically translate to bigger company earnings.
"That's something a lot of Fonterra watchers don't quite grasp," said Craigs Investment Partners head of research Mark Lister.
The New Zealand drought, which Fonterra said contributed to a 64 per cent price rise in wholemilk powder on the Global Dairy Trade online auction this year, meant a rise in the co-operative company's cost of production as it pays its farmers world prices for their milk.
Harbour Asset Management managing director Andrew Bascand said his fund management company had been flagging the "inevitable" downgrade with clients.
The maths around the ratio of a $7/kg milk price payout to farmers and cost impact meant no-one should be wildly concerned with that part of the downgrade, Bascand said.
Fonterra also attributed part of the downgrade to continuing market pressure on its Australian business and the need to accelerate efforts to lift its performance.
Fonterra's unit price fell 3.7 per cent to an intraday low of $7.20 in response to the news that forecast normalised ebit for the year was likely to be about $1 billion, instead of the $1.079 b forecast in the prospectus. The unit price ended off 2.8 per cent at $7.28.
But the giant dairy exporter left unchanged its $6.12 forecast cash payout to farmers. Also unchanged is the earnings per share guidance range of 45-50c per share.
A full update of its 2013 year result is due on September 25 and the company said it would comment on its 2014 year cash payout expectations next week.
Lister said the unit price fall was "fair" given the quantum of the earnings downgrade, but the fact the price had been as high as $8 was probably a reflection of the lack of investor understanding of dairy price volatility.
Bascand said for Fonterra, earnings volatility was a given, because it paid out the prices it got overseas and its margins took a while to catch up. He and Lister conceded the Australian consumer market was very tough with Fonterra caught in a milk price war between two supermarkets.
"The economy over there is much weaker than our own and Fonterra, like many companies, has been suffering because of that.
"Maybe the restructure hasn't happened as quickly as they'd have liked," Lister said.
Craigs had been forecasting earnings per share for the year of 50c, the top end of Fonterra's range. Now it was looking at 45-46c, Lister said.