Chinese strategy
OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.
The 30c decrease in the dairy giant's forecast farmgate milk price for the current season to $6.05kg/MS is in response to softening global dairy commodity prices.
The forecast net profit after tax range is unchanged at 40-50c a share, meaning a forecast payout range before retentions is $6.45-$6.55.
Fonterra also announced a lower opening forecast payout for the coming 2012/13 season starting June 1, 2012, reflecting an outlook for higher dairy production around the world flowing through to lower international dairy prices. The opening forecast payout range before retentions is $5.95-$6.05, comprising a farmgate milk price of $5.50kg/MS and a forecast net profit after tax range of 45-55c per share.
The cooperative has also set the Fair Value Share (FVS) price for the 2012/13 season at $4.52 per share, the same level as in the current season.
2011/12 forecast Payout range
The updated forecast payout range for this year comprises a lower forecast farmgate milk price of $6.05kg/MS and a forecast net profit after tax range of $570-720 million, equating to 40-50c per share.
As a consequence, Fonterra forecasts that a 100% share-backed farmer will earn on average in the range $6.45-$6.55kg/MS before retentions.
CEO Theo Spierings says the lower forecast farmgate milk price is due to continued softening of commodity prices.
"The Global Dairy Trade trade weighted index has declined 20.3% since our last farmgate milk price forecast of $6.35 in April," says Spierings.
"Dairy production levels in the US and Europe are high, while we continue to have higher-than-normal production levels from New Zealand. All this is occurring at a time of heightened uncertainties in global markets."
Spierings says with the softening of global commodity prices, operating earnings were expected to be marginally ahead of 2011.
2012/13 Opening Forecast Payout
For the new 2012/13 season and financial year, Fonterra is forecasting a farmgate milk price of $5.50kg/MS plus a forecast net profit after tax range of 45-55c per share. This means Fonterra is forecasting that a 100% share-backed farmer will earn on average in the range of $5.95-$6.05kg/MS before retentions.
Fonterra chairman Henry van der Heyden says the opening forecast for 2012/13 reflected a realistic outlook by the board towards global dairy markets over the coming season.
"There's a lot of milk out there and prices have softened," says van der Heyden. "We think that supply and demand should move more into balance later in 2012 which may help ease the downward pressure on prices.
"However, there is no consensus among outside experts on how soon we can expect to see prices recover so it is important that we give our best possible estimates to farmers so they can plan accordingly."
Spierings says Fonterra was currently preparing its budget for the 2012/13 year but was targeting a net profit after tax in the range of NZD$670 million to NZD$820 million, equating to 45-55c per share. The mid point to this forecast is 5c per share higher than the current season mid-point.
The board has yet to forecast a dividend range for 2013. Fonterra's dividend policy is to pay out 65-75% of net profit after tax (adjusted for one-off items and other factors).
Fair Value Share Price
Fonterra has set the fair value share price for the 2012/13 season at $4.52 per share, the same as the current season's price.
The independent valuer, Grant Samuel, assessed a restricted market value range with a mid-point of $4.38 per share. As this is below the current base price of $4.52 that applies during the transition to restricted market value, the fair value share price has been set at $4.52 per share.
Grant Samuel's latest valuation is up 12c per share or 2.8% on its mid-point restricted market value estimate of December 2011 and up 20c per share or 4.8% on last year's mid-point restricted market value. This compares favourably to an increase in the NZX50 of 2.5%.
Spierings says the improved valuation was mostly due to a significantly higher value for Fonterra's Asia-Africa/Middle East consumer business reflecting continued earnings growth. This was partially offset by a lower enterprise value for the Australia-New Zealand consumer business due to a continuation of challenging market conditions.
Under Fonterra's constitution, the valuer is required to assess two valuation ranges: a fair value range for the cooperative, and a discounted restricted market value range reflecting that Fonterra shares can only be held by supplying farmers. As in previous valuations, the valuer has applied a 25% discount to the fair value range to assess the restricted market value range.
End of Season Share Purchases
Fonterra also announced it would not be issuing dry shares during the 2011/12 end of season period prior to the launch of Trading Among Farmers. Shares will still be issued in anticipation of valid increases in farmers' production for the 2012/13 season.
Van der Heyden says the board had taken the decision to minimise the risk of farmers making decisions about purchasing dry shares ahead of receiving the offer documents in support of the launch of Trading Among Farmers.
"Shareholders will be receiving substantial information leading up to the final vote on Trading Among Farmers in June and on the operation of Trading Among Farmers after that.
"We want farmer shareholders to have the best available information on which to base their investment decisions so it makes sense to put a hold on issuing dry shares until all the detail is in.
"No board would encourage people to invest without access to full information and this is a similar situation.
"Then everyone is making their individual decisions based on the same information and are given the same opportunity."
