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Fonterra: Turnaround In Q3 '20 Results

Jun. 11, 2020 11:24 AM ETFonterra Shareholders Fund (FTRRF)
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  • Solid 3Q20 results despite COVID-19 challenges.
  • Focus on de-gearing with low target leverage.
  • Notwithstanding its strong results, dividend may be postponed in FY20.

Company Profile

Fonterra Shareholders Fund (FSF) is one of the world's largest processor of dairy products accounting for roughly a fifth of global dairy trade. FSF generates revenue from businesses including milk processing of commodities, largely in New Zealand and Australia, and food services and consumer dairy businesses in Australia, New Zealand, Asia, Africa, the Middle East and Latin America. FSF is well placed to participate in strong global growth in demand for dairy products.

Strong 3Q Results; Likely to deliver FY20 earnings above 15-25cps guidance range

FSF's 3Q20 normalized EBIT was solid, +15% YoY to $231m, as new management returned the co-op ‘back to basics’, which has involved streamlining operations and taking cost out, and divestment. Despite COVID-19 challenges, normalized Group EBIT was +59% to $814m for the nine months to March, with Ingredients +9%, Food Services +54% and Consumer +46%.

FSF now expects FY20 earnings to be in the top half of the 15-25cps guidance range. Indeed, earnings delivery year to date is already sufficient for FSF to deliver FY20 earnings towards the top end of the guidance range, with 3 months to spare. While management's outlook commentary suggested earnings growth rates may ease in Q4, most notably in Food Services where demand has softened with many cafes, bakeries etc. shut or suffering from reduced patronage due to the impact of COVID-19, and the spike in Consumer product sales from pantry stocking that boosted 3Q sales and EBIT has not been maintained, I still believe FSF as likely to exceed the top end of the FY20 guidance of 15-25cps.

Debt reduction prioritized over dividend payment

While FSF’s turnaround looks to be on track, a key part of that turnaround is prioritizing paying down debt over paying FSF dividends. Recall that while FSF did not pay an interim dividend in March, it

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I am a value investor. Interested in mis-priced securities that presents a high upside potential with down-side protection in balance sheet. I am a trained research analyst and continue to practice in industry.

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