Opportunity for Fonterra
Fonterra has a rare opportunity to shed assets that aren't performing, write down others to attract investment partners, and become a company more focused on value than volume, says First NZ Capital.
Head of institutional research Arie Dekker says the new senior management, by dropping capital expenditure intentions in the year ahead to $650 million from $1.005 billion, have already given an important signal that they will "address one of the key hygiene factors necessary to make it a more investable proposition."
"Fonterra Shareholders Fund needs to show greater respect in its use of what we continue to highlight is scarce access to capital," Dekker said in a note to clients. "Farmers and investors have lost considerable wealth from poorly thought-out and executed investment outside the core business in recent years."
Fonterra posted its first-ever loss in the past financial year, replaced its chief executive, and this week saw further changes on its board.
Dekker urged that options for restructuring be approached with "nothing off the table".
He lists among the options: the orderly disposal of Fonterra's 18 percent stake in Chinese infant formula producer and marketer Beingmate, a possible write-down of its China Farms asset to attract the investment capital partner it has talked about needing for some years, being willing to sell parts of its Australian and Latin American businesses, and being willing to consider selling brands that were either mature or under-performing.
Asked by BusinessDesk which brands and Australian assets might fit the bill for disposal, Dekker said "I'm really suggesting anything."
"But visibility in the business has been low and if they want to move the dial, they are going to need to pick some winners and they may need to lighten their load."
His conclusions were in part based on recent discussions with the company, as well as the public statements of acting chief executive Miles Hurrell and recently appointed chairman John Monaghan. Fonterra shareholders this week offered a democratic rebuke for recent performance by electing a dissident ex-director, Leonie Guiney, to the board; failing to re-elect one of its most experienced commercial directors, Australian Ashleigh Waugh; and giving three other candidates so little support that a vacancy now exists on the board.
Ahead of yesterday's annual meeting, the Fonterra Shareholders' Council published analysis by investment firm Northington Partners that showed an "unambiguous" pattern of commercial under-performance by Fonterra since its creation in 2001.
Dekker said he expects Fonterra will concentrate immediately on reducing its debt levels and operating expenditure and improving performance at the same time as it uses the next year to completely refresh its strategy, detail of which he doesn't expect to see until well into calendar 2019.
Any proposals for capital restructuring would come at the end of that process, he said.
Farmer priorities for their cooperative would continue to dominate its direction, "but we see no reason for this not to align with the value outcomes investors would be interested in".
FNZC saw no sign the Trading Amongst Farmers model, which has allowed limited non-farmer capital to gain exposure to New Zealand's only global business of scale, won't survive "and major changes in capital structure seem unlikely".
Likewise, "farmer appetite remains low" for splitting out some of Fonterra's businesses to allow non-farmer shareholders to have voting rights.
Dekker has argued forcefully for some months that Fonterra needs to pull back from some of its internationally focused investments, particularly in China, in favour of making the best possible returns from the New Zealand milk pool.
"New Zealand farmers aren't well placed to fund the substantial offshore milk pools that were a core part of the previous strategy," he writes in the latest note. "Retaining critical mass in milk supply in the New Zealand market remains a key priority. For FSF to retain critical mass - particularly in a more benign milk growth environment - this requires it to be competitive with the independent processors," Dekker writes.
FCNZ still expected Fonterra to make new investments against a more focused asset base, but "where these investments are meaningful, we expect to see better transparency and accountability on them and on an upfront and ongoing basis than in the past six years."
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