A persistent critic of Fonterra’s performance and disclosures, Dekker said new chairman John Monaghan and interim chief executive Miles Hurrell had begun with good intentions.
He highlighted those intentions in a note to FNZC clients published after Fonterra reported its 2018 financial year results, including a $196 million net loss, the first in its 17-year history.
“Fonterra sees the need to address transparency, take a hard look at current positions, with reviews under way and ultimately deal with the big issues – lifting performance, retaining farmers and focusing on the core co-op, with any extension matched with capital, capability and openness.”
Serious consideration should be given to simplification of the business and Dekker favours shrinking around core competencies and capital capacity.
There appears to be some alignment with the needs of farmers for greater capital flexibility.
Fonterra needs to address the net returns associated with investing in value-add capacity in the absence of New Zealand milk supply growth.
The forecast reduction in capital expenditure this financial year to $650m is a step in the right direction.
“It would appear the time is coming for Fonterra to scale back its ambitions, pick some key areas in which it can win and ensure that it is well placed to deliver on the core requirements of its farmer shareholder base – to be a strong co-operative.”
Dekker identifies the non-core activities as Fonterra Australia, its operations in Latin America, the China Farms and the Beingmate investment.
In its review the company needs to look carefully at the incremental earnings on more investment in value-add versus the earnings generated on default commodity production using existing capacity.
The past six years of Trading Among Farmers saw significant investment funded through borrowing that did not result in any growth in cashflow or earnings, Dekker said.
In the note FNZC upgraded its rating of FSF from underperform to neutral with a target price of $5.09.
It factored in earnings per share increases to 36c, 45c and 53c in the next three financial years respectively, resulting in forecast dividends of 20c, 27c and 32c.
