Capital structure 'not working'

Garry Reymer, Cambridge, who unsuccessfully stood for Fonterra director elections in 2014, says the co-operative's milk price to suppliers are dropping.

And with poort cashflow on farms, the mood among shareholders isn't good, he adds.

"If we try and look forward 12 months it will be even worse, unless there is a big turnaround in milk price," Reymer told Dairy News.

Reymer points out that the forecast advance rate is $5.50/kgMS to the end of May, $1.20 down on last season.

With a forecast price mid-point of $6.75, the deferred payment will be $1.25 - down $0.25 on the last deferred payment.

Fonterra is expected to pay a good dividend given the milk price, an input cost, is low. Reymer anticipates a dividend of around 38c/share.

He also points out that there will be no more capital distribution like the 50c/share paid out to shareholders last month.

"Add that all up and the hypothetical 150,000 kgMS dairy farm is $180,000 down on season cashflow and $124,000 down on the end of year retro payments, for a total of $304,000.

"So, with poor cashflows, high overdraft/debt, low share price, and the clincher is poor shareholder engagement with the co-op, you have a situation where a hostile takeover offer could well be tabled."

He says the Asia Pacific region is forecast to have a milk deficit by 2030.

"This is on the back of 209 million more people and a small lift in consumption per capita. It is not hard to imagine then that some of these countries will look to secure their own milk pools if their domestic supply is not able to keep up with demand.

"Then if you throw into the mix the ageing farming population and the water reforms such as the national policy on fresh water, PC1 and some scope 3 coming, I can see many farmers who would be receptive to any reasonable offer.

"So, I think there's definitely a risk to Fonterra facing a takeover."

Fonterra's share price has lost 23c/share in the last two weeks alone. It was trading at $2.47/share last week.

Reymer says he's not surprised at Fonterra's share price falling after the $800m capital distribution to shareholders.

"This is not unusual behaviour for a share, and I suspect the same would happen post dividend," he says.

"I have heard of farmers selling before the distribution because, as they have picked correctly, the drop was greater than the distribution.

"If that happens again post dividend then we could be looking at a high $1 or very low $2 share price.

"What does this all mean, you may ask? I have commented in the past and even talked about it many years ago when I stood for director, that if Fonterra got things wrong on capital structure, they would be vulnerable to a takeover offer."

Reymer says a key point around takeovers is apathy.

Fonterra shareholder Garry Reymer says farmers are giving up on the co-op.

"If you look at the former big dairy co-ops across the Tasman, they died mainly because the board and management lost touch with its shareholders.

"This is exactly where we are at today with Fonterra.

"In the early days of Fonterra, we would fill the halls and rugby clubrooms around the country for accounts meetings or director road shows.

"Now you are lucky to get 30 or 40 people to a director meeting in Hamilton. Farmers are giving up on the co-op because they are sick of being told they are listened to, but not heard."

A Drop In The Ocean

Fonterra's attempt to stabilise its share price by launching a $50 million share buyback scheme won't work, says Garry Reymer.

He points out that farmers will only need to hold 1 share for 3 kgMS supplied to the co-op.

"This has the potential to free up hundreds of millions of shares and something that Fonterra will not be able to soak up with $50m," he says.

"And, once you have a surplus of anything, the price drops even further.

"What will be interesting in all this is how it plays out and how much value shareholders will put on the dividend.

"If investment advisers think dividend is going to support the share price then they would be advising clients to buy Fonterra units now.

"If the future earnings of Fonterra had the same confidence in the market of, say a2 Milk at its peak, the unit price might be up around $30 instead of $3."