While several risks remain, Fonterra has emerged from the first stage of its restructure with a positive earnings outlook for FY20.
-Improved ingredients returns in NZ and recovery in
-Pricing pressure in UHT cream and cheese in NZ
-Knots in capital structure still to be ironed out
One of the more positive news items in the current environment has come from
While no interim dividend was declared Fonterra aims to pay a final dividend. While there is still a risk around the drought and higher milk prices as well as the impact of coronavirus on foodservice volumes, the company has maintained guidance for earnings per share of NZ15-25c.
After several challenging years, Credit Suisse observes the balance sheet is on track for substantial reductions in debt, which could underpin a resumption of dividends in the second half.
Evidence for this comes from improved ingredients returns in
The first half normalised earnings (EBIT) lifted to NZ$570m, ahead of
Guidance has revealed some earnings risk in the second half from reduced foodservice sales initially in
Fonterra is still progressing divestments of the
The company completed the sale of DFE and foodspring during the half year, making NZ$401m and NZ$68m in gains on sale respectively.
Capital Structure
No update was provided on the review of the capital structure except that Fonterra will remain as a co-op. The exit of phase 1 of the restructure has removed the risk to the balance sheet and the board and management is working with farmers regarding the future of the co-op in 2020.
Credit Suisse expects this next phase will be difficult and achieving consensus will take time, believing investors should wait for more detail on the capital structure plans and the size and scope of the co-op.
The broker points out retention of lower growth and non-NZ milk pool businesses need to be tested against what it means for supporting more capital flexibility for farmers and improve sustainable returns.
Macquarie asserts the current structure works against unit holders and the company's policies appear to be about maximising costs and investing in working capital to favour farmers. Macquarie has an Underperform rating and NZ$3.50 target and assesses the volatility in the business makes forecasting a challenge.
FNArena is proud about its track record and past achievements: Ten Years On
All material published by
© 2020 Acquisdata Pty Ltd., source