Forsyth Barr head of research Andy Bowley said since listing, prices in the co-operative’s markets have been on “quite a roller coaster ride” with two profit warnings and a significant global food safety scare. But the share price and unit price in the fund have been holding up and appear to have settled close to the $7/unit mark, significantly above where analysts are putting the value.
Bowley has just revised his target price down to $6.20, dropping it 40c following the release of the co-op’s annual result and its forecasts for a tougher year ahead for its value-adding businesses due largely to the higher milk price. He’s also retaining his “sell” recommendation for units at their current price.
Fonterra has challenges with the three C’s – complexity of its business, convoluted capital structure and conflicts between farmer shareholders and unit investors when it comes to milk price or cost of goods sold, depending on who you are.
The complexity of Fonterra and its businesses meant the capital market and, to some extent, farmers were on a huge learning curve when it came to operating in the markets. That might explain why market reaction to Fonterra has not always been as rational as would ordinarily be expected, he said.
He anticipates a more informed market to appropriately price the units and shares over time.
Fonterra had a relatively high risk profile compared with other NZX50 companies. Its units were also expensive relative to those companies and other dairy companies around the world as well as other consumer-branded companies, he said.
The gross dividend yield wasn’t particularly attractive either at less than 5%. But TAF had provided a stable capital base and enhanced price discovery for Fonterra shares. External investors also had some exposure to New Zealand’s biggest company.
Despite the greater flexibility farmers who were growing faced higher costs to enter and the high share price could encourage farmers to leave, he said.
“It’s an unusual circumstance for an NZX-listed company to talk down its share price as we’ve seen it do some times,” he said.
Craigs Investment Partners research analyst Arie Dekker said over the past year the mechanics of both the Fonterra Shareholders’ Fund and the Fonterra Shareholders’ Market have fundamentally worked as expected.
Farmers were slow to access their sharemarket in the first half of the year while prices sat at new highs but after the bonus issue in April and the supply offer in May there was a big increase in activity, likely to have been spurred by the need for some to either buy or sell shares to meet December 1 share standard requirements.
“They’ve shown a willingness now to sell when prices are up and buy when prices are down,” Dekker said.
It was difficult to say why there had been some unexpected movements in price following announcements. This could be attributed to the market’s lack of understanding, general market movement, someone trying to build a stake or someone selling.
Dekker said setting a price was difficult when there’s still a lack of visibility into the drivers of underlying performance and he called for Fonterra to provide more financial information. He’s arrived at a 12-month price target of $6.74/unit by rolling forward a discreet cash flow (DCF) valuation of $6.40 by the cost of equity and then deducting the dividend.
Even though TAF was performing well Dekker said he continued to apply a 10% discount to the DCF to reflect “limitations in the co-op structure and the early stages of a turnaround in earnings”.
