Saturday, March 30, 2024

$800m repay target is achievable

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Fonterra has $5 billion in assets beyond what are necessary for its core milk processing and ingredients sales business so should readily find its $800 million debt reduction, dairy industry analyst Geoff Taylor says.
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And now Fonterra has dropped its volume-driven strategy it should not find the $800m debt reduction target difficult.

Taylor is a director of TDB Advisory, which has just updated its April 2018 report into the capital structure and returns of companies in the dairy industry.

The update draws on analysis of Fonterra by Northington Partners for the Fonterra Shareholders’ Council, published before the annual meeting in November.

The council said the analysis shows the company’s financial performance since inception is poor.

But TDB believes that was too harsh and the figures show how well the New Zealand ingredients business has done since Fonterra was formed.

That business is the core of Fonterra in that it collects, processes and sells the milk produced by its NZ suppliers and shareholders.

It is regulated by the Dairy Industry Restructuring Act, employs about half of Fonterra’s capital and is what farmers most identify with.

Fonterra is now re-evaluating all its investments, major assets and partnerships.

“We make observation that it is in the interests of shareholders to find a realistic value for all the non NZ ingredients business (being $5 billion-plus of book value of capital),” TDB said.

“If Fonterra could return a large amount of capital to shareholders and still maintain a similar earnings per share from the ingredients business it would clearly be a positive alternative for shareholders to discuss.”

Northington said the NZ ingredients business had a return on capital employed of 6.8% over the past five years, better than the cost of capital.

“It is the rest of Fonterra – consumer, food service, China farms and international milk pools – that is subtracting value,” TDB said.

Taylor said Fonterra is on track to fall to 75% milk market share in 2021.

Assuming NZ milk production is flat, Fonterra’s aim of reducing capital expenditure within its debt reduction target will be achievable.

“Then perhaps discussion can move on to a return of capital to shareholders,” he said.

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