Friday, March 29, 2024

Brokers’ predictions vary widely

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Sharebrokers vary widely in their expectations for Fonterra share prices in 2017, from status quo at $6.10 to a high of $7.85 by year’s end.
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One of those expecting a substantial increase was Craigs Investment Partners, which on December 23 published a research note containing a Fonterra Shareholders Fund (FSF) target price of $7.15.

It was among three brokers who recommended buying the stock, plus one who said hold and another who said sell.

“We have previously been cautious on FSF due to GDT price volatility and higher gearing but recent financial results have demonstrated a stronger base, good management execution and debt levels reduced to more comfortable levels,” Craigs said.

“FSF offers good value to shareholders at current levels and earnings growth should drive share price performance.”

Craigs analysts thought Fonterra could repeat its 2016 financial year dividend of 40c/share in both of the next two financial years.

They forecast earnings per share would increase from 51c in 2016 to 54c this year and 59c next year, from which they assumed Fonterra directors would pay 74% out in dividend this year and 70% the next.

The transformation benefits were being delivered in higher margins from ingredients, food service and consumer products while Fonterra had reduced costs and worked hard on inventory management.

The turnaround of the Australian business should be delivered in 2017, restoring its returns.

Craigs said the forecast price/earnings ratio (PE) was 11 times and the forecast gross yield on the share would be 6.7%.

However, Forsyth Barr analyst James Bascand recently took an opposing view, saying earnings momentum had weakened and stream return volatility had reared its head again.

He forecast earnings per share at 50.4c, at the lower end of the current guidance from the company of 50-60c.

Therefore his rating was changed from neutral to underperform and the target price lowered by 5c to $6.10.

Rising input costs would cut into margins for consumer and food service products and lower milk supply would reduce operating efficiencies, he said.

Forsyth Barr agreed with Craigs on forecast PE and yield.

In a Christmas update for investors First NZ Capital forecast a FSF gross dividend yield of 7.5%, slightly above the NZX50 average and a PE of 10 times, considerably more favourable for investors than the NZX50 average of 20 times and the A2 Milk level of 25 times.

Late last year Fonterra marked four years of Trading Among Farmers (TAF) and the initial public offering in November 2012 of FSF units, when both supply shares and units were listed on the NZX exchange.

In the past year dairy farmers traded a total of 4.5% of the Fonterra Co-operative Group supply shares (FCG) among themselves in the closed market, with 12,728 trades having a total value of $434 million.

At the end of the calendar year there were 1.604 billion supply shares in farmers’ hands, down 0.8% (13m shares) from the number issued at TAF launch.

The market capitalisation was $9.64b.

In contrast, the FSF investment unit market continued to be very active, with 20,000 trades totalling $600m in value, an average of $30,000 per trade.

Market turnover was 80% of the 121m shares issued and there was only one substantial shareholder at year’s end with more than 5%.

FSF grew from 95m units to 121m over the past four years and now contained 7.5% of the total issued capital of Fonterra. Its own market capitalisation was $730m.

Since the launch there had been 91,000 FSF unit trades and only 39,400 trades of FCG shares.

FSF had traded more than $4b in value, versus $1.4b for FCG, reflecting the much longer-term nature of farmers’ ownership of Fonterra supply shares.

The average transaction of FCG shares during the past four years was $35,000 or about 6000 shares at today’s value.

The TAF model relied on the markets in FSF units and the FCG shares to be mirror images, providing an informed, liquid market for the setting of values.

FSF/FCG values began 2017 at similar levels to January 2016 and January 2015.

Both of the two previous years contained big dips in share/unit prices – down as low as $4.60 in June 2015 and $5.32 in June 2016.

Since listing at $6.85 FSF hit a maximum of $8 in May 2013 and down to $4.60 at its lowest point.

 

Disclosure: Hugh Stringleman is a FSF unit holder.

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