The dairy giant would announce its 2017 results on Monday, September 25, and was expected to confirm last season’s $6.15/kg milksolids payout to farmers and the 40c/share dividend to farmer-shareholders and unit investors.
There might be room for small increases in the finalised measures of both returns because of the strong dairy market recovery during the past 15 months.
Attention would also be focused on Fonterra’s forecasts of supply and demand in world dairy markets, any change to its $6.75/kg milk price forecast for 2018 and its 45-55c/share earnings guidance.
As the co-operative champion of New Zealand’s biggest primary industry and the largest company in the economy, its annual results would be carefully studied around two major themes.
The first concerned progress in adding value to standard dairy commodities and the extent to which that resulted in sustainable profits and dividends.
Attention would be paid to the performances of its offshore businesses that collectively amounted to New Zealand’s largest foreign direct investment – in Australia, China, Sri Lanka, Chile and Europe.
Analysts expected Fonterra to announce a slightly reduced net profit after tax (Npat) in the range $775-$790 million for 2017, versus $810m in 2016.
With 1.6 billion shares issued, earnings per share (Eps) would therefore be in the range 46-49c, from which Fonterra directors had already made guidance that a 40c dividend would be paid.
The first guidance made in late July for the new financial year was reduced slightly to 45-55c Eps, from which directors would have to pay out a high proportion to maintain dividend at 40c.
Rising world prices of dairy commodities including milk-fat products at all-time highs made it harder for Fonterra to maintain profit margins and earnings.
It valued its own ingredients as higher cost inputs when making added-value products.
The worst example of that problem was three financial years back when dividend shrank to 10c as the milk price reached $8.50.
Company strategy was to drive down costs, try to maintain profit margins and to convert more and more milk into higher-value products, particularly food service items like cheese and cream.
Chief executive Theo Spierings set goals that targeted both high milk prices and higher profits, not either/or.
He called it the “volume to higher value at velocity” strategy.
Craig’s Investment Partners said a main measure would be the turnaround in the Australian business to be reported for the 2017 financial year.
“Recent financial results have demonstrated a stronger base, good management execution and debt levels have reduced to more comfortable levels.”
Other share market analysts were not so positive.
“The flat year-on-year earnings guidance range is likely driven by rising input costs, squeezing the earnings margin for Fonterra’s consumer and foodservice operation,” Forsyth Barr said.
“Earnings volatility in the ingredients business has raised its head again in the form of uncertain stream returns.”
Forsyth Barr also drew attention to the unresolved court action between French dairy giant Danone and Fonterra, stemming from infant formula market disruption after Fonterra’s voluntary whey protein concentrate recall in 2013.
Another analyst said he would be watching Fonterra’s ability to generate sustainable earnings growth, the value attributed to larger offshore investments and their contributions, and the loss of NZ milk supply to competitors.
Performance in two out of three key investment directions had been disappointing – the capital sunk into China Farms and the $700m invested in Beingmate, the Chinese infant formula maker and distributor.
The third strategic investment, into more food service product processing capacity, looked more encouraging.
But it was possible Fonterra’s falling milk supply in NZ was being undermined by an inability to add sufficient value from its larger overseas investments.
Perhaps that was being viewed negatively by dairy farmers pondering switching supply to independent processors versus having capital tied up in Fonterra shares.
Farmers might be happier if Fonterra concentrated on adding value to its NZ milk pool rather than the offshore pools, the analyst said.
