If Westland’s sale to the Chinese wasn’t warning enough last week’s massive asset write-downs of five Fonterra businesses drove home the message.
Three $200m non-cash impairments were announced for DPA Brazil, China Farms and the New Zealand consumer business.
Smaller write-downs were attached to its Australian ingredients processing business and the foreign exchange reserve effects of its exit from Venezuela.
Jarden research head Arie Dekker said Fonterra’s balance sheet is catching up with its earnings and cashflow reality.
Whereas in the past an investment like the Beingmate stake was carried in the books with a premium attached for strategic value, the new approach is a more open and honest way of assessing value.
“Clearly, that remains a subjective exercise but this announcement does reflect a meaningful cleansing,” he said.
The Beingmate holding was written down to near market value last year and now the challenge is achieving that value in small share sales.
Efforts to find $800 million of debt repayment through the sale of non-core assets fell short in the 2019 financial year.
Chief financial officer Marc Rivers conceded the target was missed but said total debt has been substantially reduced.
Sales proceeds will, at best, have been eclipsed by likely write-downs of $820m to $860m.
Fonterra has now forecast a loss in 2019 of $590m to $675m to follow the previous year’s $196m loss.
Chairman John Monaghan says the size of the forecast loss could not be ignored and it will not pay a dividend this year.
“Not paying a dividend is part of our stated intention to reduce the co-op’s debt, which is in everybody’s long-term interests.”
The market capitalisation of 1.6 billion Fonterra supply shares fell from $8.2b to $6b during FY2019 then lost a further $400m in the last week.
That is an average $250,000 loss of share value for every Fonterra dairy farm.
Such an equity loss now has to be reflected in 10,500 farm balance sheets and asset valuations at the end of this financial year, plus whatever loss of confidence and liquidity in farmland has ensued.
At $3.50 Fonterra Shareholders’ Fund tradable units are a laughing stock in the sharemarket, near to the worst performer on the board since listing in late 2012.
Therefore, the structure of Trading Among Farmers has been badly weakened at the fundamental link between unit price and supply share price.
Fonterra’s reputation has suffered major blows on the sharemarket and among the wider public, from golden handshakes to former chief executive Theo Spierings, who after eight years left behind a ship holed below the waterline.
His final pay of $4.67m included salary for one month of FY2019, superannuation and final performance payments.
It was paid at the time of his departure in August last year and contractually could not be withheld by the board.
The latest asset devaluations in the hundreds of millions of dollars, euphemistically called one-off accounting adjustments, show the ship has been rusting for some time.
The new strategy, to be unveiled on September 12 with the annual results, will have to be backed by structural changes, including to capital.
Coming up with structural options could be comparatively easy compared with getting 75% approval from farmers.
A split between the core business of milk supply and processing and the value-add products, reflected in compulsory supply shares and optional, tradable market shares, seems a possibility.
On the positive side, Fonterra confirmed trading in FY2019 will produce earnings of $160-$240m and the forecast milk price of $6.30 to $6.40/kg will be paid.
Monaghan said the co-operative remains strong at the core.
“Over the last 12 months we have improved our cashflow, reduced our debt and removed significant cost from within the business but there is still more to do.
“The business units that are at the heart of our new strategy are delivering for us and we look forward to discussing our new strategy and our performance with our owners in September.
“It’s important that we now implement our new strategy and deliver value back to them,” he said.
