Analysts expect Fonterra to produce earnings a share towards the upper end of its guidance of 15 to 25c from net profit around $430 million.
Under the new dividend policy directors would pay 10-12c a share final dividend, thereby distributing half of the net profit. No interim dividend was paid.
It would be the first return on capital since the interim in FY2018 and would be a road mark in the return to financial health for the co-operative after two turbulent, loss-making years.
Chief executive officer Miles Hurrell said in March that his key goals for 2020 were to achieve the earnings guidance, push gross margin over $3 billion, reduce debt to no more than 3.75 times earnings and keep capital expenditure below $500m.
In a further update in May, he said the co-op had a strong balance sheet with good cash flow and was continuing to reduce debt.
“Based on the first nine months we expect our full year underlying earnings to be at the top end of the 15-25c range,” Hurrell said.
“However, there are significant uncertainties in the last quarter – for example, how quickly the food service sector recovers, timing of shipments and how the broader economic downturn will impact our business.”
Revenue for the full year will exceed $20bn and milk payments to farmers around $11bn on a farmgate price of $7.10-7.20/kg milksolids, the fourth highest in Fonterra’s 20-year history.
Craigs Investment Partners has forecast earnings before interest, tax, depreciation and amortisation (Ebitda) of $1.3bn, being the revenue less the cost of milk, processing, exporting and running the company.
It predicted the net profit after tax will be $410m compared with a net loss of $605m in the previous financial year.
Net debt at the balance date (July 31) will be $4.4bn, down $1.5bn from $5.9bn in July 2019 and comfortably below the 3.75 times multiple of earnings that Hurrell targeted.
Craigs says Fonterra had disappointed with its recent results and had yet to deliver on its value-added strategy.
“The company has now dealt with a number of major issues and the focus will now turn back to its ability to regain earnings momentum,” he said.
Jarden’s head of research Arie Dekker says the interim results in March showed Fonterra’s balance sheet was on track for a substantial debt reduction and that a resumption of dividends in the second half looked likely.
He reminded clients that Fonterra’s management planned to grow earnings back to 50c a share over the next five years but had provided no details of how that would be achieved.
“We continue to view the path to get there as uncertain and believe investors should wait for more detail from Fonterra on its capital structure plans and the size and scope of the co-op.”
While the financial results may be back in the black, constitutional matters such as Trading Among Farmers, investment units, the share standard and the role of the Shareholders’ Council remain under review.
A small group of directors and senior managers have looked at capital structure and its alignment with the new company strategy but no clues have yet emerged.
The heart of the matter is the retention of milk supply to fill the stainless steel amid the threats from competing processors, environmental needs and alternative land uses.
Analysts and investors will also be keen to hear of further progress on the portfolio review and non-core divestments like China Farms and Beingmate and any return to profitability of Australian and Chilean operations.
Dekker said the company had to weigh up the need for offshore businesses against greater farmer capital flexibility and the generation of sustainable returns on capital.
The 2020 results will be the first substantive report on Hurrell, appointed as interim chief executive two years back and formally installed 18 months ago.
When he unveiled the new strategy last September, the three-year business targets were an 8.5% return on capital, a 35% debt-to-debt-plus-equity ratio and 40c a share in earnings.
Only the debt ratio appears achievable in FY2020.
Forsyth Barr analysts say Fonterra may report numbers better than the consensus forecasts.
They based that possibility on the stronger than anticipated recovery from covid-19 and the upside for Fonterra’s food service businesses in China and Southeast Asia.
Fonterra’s supply share and investment unit prices on the NZX stock exchange returned recently to $4 after averaging around $3.75 for most of 2020.
Some share brokers have advised their clients that the units could be worth buying if the FY2020 results are better than expected, that dairy markets have avoided covid-19 pitfalls and Fonterra makes sustainable changes to its capital structure.
