He wants five-year projections on investments required and expectations for core products and markets, plans for the remaining offshore assets in Australia, Sri Lanka and Chile – where research and development are targeted – and the new capital structure.
Under the heading Lessons from a Lost Decade, Dekker pointed out that 24c a share normalised earnings were well below Fonterra’s consistent 40-50cps performances of a decade ago.
The company had reset the balance sheet and made a necessary retrenchment in poorly targeted growth investment.
Debt had been returned to the level before Trading Among Farmers (TAF) was introduced in 2012 and a further saving of $400-$500 million was available from exiting China Farms and Brazil. That should deliver the target debt ratio without any more meaningful loss of earnings.
But while redemption risk had been plugged by TAF, milk supply risk remained a big issue.
Fonterra had lost nearly 10% of the New Zealand market share over the past eight years as its supply volume stayed level and that of the other processors, collectively, had doubled.
The principles governing the capital structure review prioritise sustainable milk supply and financial flexibility for farmers.
All stakeholders need to know the right size for the co-operative, taking into account investment needs and farmers’ requirements for invested capital.
For example, retention had amounted to only $900m over 20 years, including the 38cps just declared.
“We think farmers and outside investors would like to clearly understand what earnings are being retained for and what renewed balance sheet capacity might be invested in,” he said.
Dekker says the new dividend policy had coincided with a high milk payout to produce the 5c dividend.
“In 2021, we expect less adjustments and for Fonterra to be able to pay out in the region of 50% of its earnings, allowing for the dividend to step up to 10c to 17.5cps,” he said.
Craigs Investment Partners’ analysts say they thought the debt repayment and dividend policies were prudent and sensible and will eventually help steer Fonterra’s balance sheet back to sustainable levels of debt.
However, they had expected a 2020 dividend of 10-12c and called the eventual 5c non-imputed dividend a “sprinkling” after the company’s major spring clean.
The lower payout was a result of unforeseen impairments which now form a component of the dividend policy.
Craigs says the unforeseeable nature of impairments had significant implications for dividend forecasts.
“The implication is that dividends are likely to be systematically overstated to an extent of unknown asset impairments,” it said.
But when looking forward, Craigs discounted the possibility of major impairments again this financial year, and therefore assumed the dividend policy would deliver about half of the 20-35c earnings guidance.
Commentator Keith Woodford says clouds still hang over Fonterra’s two overseas assets in Australia and Chile, implying that further major impairments may be required.
“I cannot find any mention in the annual report as to whether active consideration was given to the value of Fonterra’s Australian assets,” he said.
“My own suspicion is that if these assets were offered for sale they would not sell for the current values in Fonterra’s books.”
