New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2><a target="_blank">Dairy Sector</a></h2>
Counting Carbon Emissions
The environmental impact of the dairy sector is gaining increasing government/regulatory focus as well as attention from consumers and the broader public. The dairy industry makes up ~23% of New Zealand’s total greenhouse gas (GHG) emissions, primarily from methane on the farm. The NZ listed dairy companies have started the complex journey to lower emissions — with bold targets, various initiatives (including farmer incentives) and good disclosure. However — it will be no easy feat. Fonterra is the most exposed of the listed players, while the key challenge for the sector is lowering natural emissions from animals.
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.0.1&amp;permmsgid=msg-f:1652015944508276044&amp;th=16ed23bfafb27d4c&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ9GKANjFyxSU96LpznA5IQqYc2yZfqYMxvRSLwgbXVqcrb3sfkZTLMM7eSitPq_lLwt11ISrEo1SPRtVDzTpMQwUnzBrjR9QpEQNYs30WWUa1wsLvaLZYuD3C8&amp;disp=emb" width="401" height="92" class="editor-image img-responsive" data-image-whitelisted=""></figure>
<ul>
<li>The sector has an increasing will to make change: With changing attitudes and behaviours increasingly evident across farmers, processors and broader industry participants.</li>
<li>Collaborative approach: Between the broader sector and Government including some policy flexibility, support for various R&amp;D projects and processors providing incentives for behaviour change on farm.</li>
<li>Listed NZ dairy companies are being proactive with good disclosure on emissions, various initiatives underway and bold targets.</li>
<li>More information, guidance, support and tools are still needed on-farm: There is no ‘one size fits all’ silver bullet and individual on-farm plans being provided appears a logical start. Various trials and R&amp;D projects are underway across a number of areas with early signs of success. More is still required to expand the available toolbox to help lower emissions.</li>
<li>Key considerations:</li>
</ul>
<ul>
<li>
<ul>
<li>Cost/benefit: We expect accountability for emissions to lift the cost of doing business for the New Zealand dairy sector. What is less clear is (1) how the burden will be shared, (2) quantifying mitigators (i.e. pricing power, efficiencies, carbon neutral as interim marketing tool).</li>
<li>New Zealand pasture-based farming systems compare favourably to global dairy on GHG intensity. Reducing dairy production would lower New Zealand’s emissions, albeit there are unintended environmental consequences if this is simply replaced with production elsewhere.</li>
<li>Changing consumer preferences is a risk.</li>
<li>We expect the debate about best use of land to continue.</li>
<li>Industry forecasts for declining dairy herd numbers should help.</li>
</ul>
</li>
</ul>
<div class="content-highlight">
Investment View
Our preferred exposure in the New Zealand listed Dairy Sector is The a2 Milk Company (ATM), with an OUTPERFORM rating. We view current valuation metrics as attractive vs peers, history and the NZ market, particularly considering its growth outlook and strong free cashflow.
We rate Synlait Milk (SML) as NEUTRAL, while Fonterra Shareholders’ Fund (FSF) is in our Research Insights series (unrated).<a target="_blank">&nbsp;</a>
</div>
Chelsea Leadbetter, CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Dairy Sector
Counting Carbon Emissions
The environmental impact of the dairy sector is gaining increasing government/regulatory focus as well as attention from consumers and the broader public. The dairy industry makes up ~23% of New Zealand’s total greenhouse gas (GHG) emissions, primarily from methane on the farm. The NZ listed dairy companies have started the complex journey to lower emissions — with bold targets, various initiatives (including farmer incentives) and good disclosure. However — it will be no easy feat. Fonterra is the most exposed of the listed players, while the key challenge for the sector is lowering natural emissions from animals.


The sector has an increasing will to make change: With changing attitudes and behaviours increasingly evident across farmers, processors and broader industry participants.
Collaborative approach: Between the broader sector and Government including some policy flexibility, support for various R&amp;D projects and processors providing incentives for behaviour change on farm.
Listed NZ dairy companies are being proactive with good disclosure on emissions, various initiatives underway and bold targets.
More information, guidance, support and tools are still needed on-farm: There is no ‘one size fits all’ silver bullet and individual on-farm plans being provided appears a logical start. Various trials and R&amp;D projects are underway across a number of areas with early signs of success. More is still required to expand the available toolbox to help lower emissions.
Key considerations:




Cost/benefit: We expect accountability for emissions to lift the cost of doing business for the New Zealand dairy sector. What is less clear is (1) how the burden will be shared, (2) quantifying mitigators (i.e. pricing power, efficiencies, carbon neutral as interim marketing tool).
New Zealand pasture-based farming systems compare favourably to global dairy on GHG intensity. Reducing dairy production would lower New Zealand’s emissions, albeit there are unintended environmental consequences if this is simply replaced with production elsewhere.
Changing consumer preferences is a risk.
We expect the debate about best use of land to continue.
Industry forecasts for declining dairy herd numbers should help.




Investment View
Our preferred exposure in the New Zealand listed Dairy Sector is The a2 Milk Company (ATM), with an OUTPERFORM rating. We view current valuation metrics as attractive vs peers, history and the NZ market, particularly considering its growth outlook and strong free cashflow.
We rate Synlait Milk (SML) as NEUTRAL, while Fonterra Shareholders’ Fund (FSF) is in our Research Insights series (unrated).&nbsp;

Chelsea Leadbetter, CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Fonterra Shareholders Fund / Equity Bottom-Up

<h2>Fonterra</h2>
FY19 Result — Bitter, Bitter, Sweet
Fonterra’s (FSF) FY19 result had a plethora of moving parts, with some early bright spots from its strategic reset more than outweighed by a number of pressure areas, predominantly in its offshore divisions. Key positives were (1) debt reduction; (2) lower capex and opex; (3) improved gross margin in NZ Ingredients; albeit this was more than outweighed by margin pressure in the challenging Australian Ingredients and Latam consumer markets. FSF’s more streamlined strategy and lower dividend payout appear sensible; however, we don’t expect the planned turnaround to be smooth sailing, with multiple pressure points to tackle and a number of external factors which add volatility to manage.
What’s changed?
<ul>
<li>Earnings:&nbsp;EPS lowered due to asset divestments and a more conservative earnings recovery path, given disappointing FY20 Ingredients guidance.</li>
</ul>
Good progress with ‘controllables’; negatively skewed divisional results
FSF reported FY19 normalised EPS of 17cps, down -28% on the prior year, albeit ahead of its recently downgraded guidance range of 10–15cps in late May, primarily due to no staff bonuses and a stronger 4Q. Asset sales, no dividend and lower capex has helped with (necessary) debt reduction.
Digging through the detail shows some positives (improved NZ Ingredients gross margins, lower opex and materially lower capex), albeit outweighed by material earnings pressure elsewhere (Australian Ingredients, Latam &amp; Asia Consumer and Chile) from a challenging and highly competitive market.
Strategy — nothing revolutionary; back to basics
FSF’s strategic review reveal is broadly consistent with pre-signalled themes, including: putting greater emphasis on its “core product” offerings by focussing on ‘value over volume’ and prioritising NZ milk pools. Under the new operating model, FSF will move from two primary businesses (Ingredients, and Consumer &amp; Foodservice) to three geographic focussed, customer facing business divisions with the key objective being to create a leaner, ‘go-to-market’ operating model. We support a more streamlined, focussed business which has been arguably dictated by necessity. The focus now turns to delivery.
Where to from here? Earnings and dividend outlook
FSF provided first time FY20 EPS guidance of 15–25cps, a three year plan for 40cps and five year plan 50cps. Targets don’t appear unrealistic at first glance, taking earnings back to recent levels (FY16/17). However, performance over the past few years has continued to underwhelm, hence materially improved execution is required to get confidence this recovery is achievable. Little detail has also been provided in terms of the medium-term pathway and key drivers.
FSF revised its dividend payout to 40–60% of reported NPAT (prior 65–75%), with the intention to re-commence dividends in FY20 (subject to earnings and capital requirements). We view the lower policy as prudent in light of the co-op structure and task ahead to revitalise and turnaround the business trajectory.&nbsp;
<div class="content-highlight">
Investment View
Fonterra is in the early stages of material strategic change following recent underperformance. Early progress has been made to improve its balance sheet, now the focus turns to earnings. Management has multiple pressure points to tackle and coupled with volatile input prices and competitive markets make this a complex task. Unitholder and shareholder conflicts also remain an issue for FSF investors.&nbsp;
</div>
Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262

Fonterra
FY19 Result — Bitter, Bitter, Sweet
Fonterra’s (FSF) FY19 result had a plethora of moving parts, with some early bright spots from its strategic reset more than outweighed by a number of pressure areas, predominantly in its offshore divisions. Key positives were (1) debt reduction; (2) lower capex and opex; (3) improved gross margin in NZ Ingredients; albeit this was more than outweighed by margin pressure in the challenging Australian Ingredients and Latam consumer markets. FSF’s more streamlined strategy and lower dividend payout appear sensible; however, we don’t expect the planned turnaround to be smooth sailing, with multiple pressure points to tackle and a number of external factors which add volatility to manage.
What’s changed?

Earnings:&nbsp;EPS lowered due to asset divestments and a more conservative earnings recovery path, given disappointing FY20 Ingredients guidance.

Good progress with ‘controllables’; negatively skewed divisional results
FSF reported FY19 normalised EPS of 17cps, down -28% on the prior year, albeit ahead of its recently downgraded guidance range of 10–15cps in late May, primarily due to no staff bonuses and a stronger 4Q. Asset sales, no dividend and lower capex has helped with (necessary) debt reduction.
Digging through the detail shows some positives (improved NZ Ingredients gross margins, lower opex and materially lower capex), albeit outweighed by material earnings pressure elsewhere (Australian Ingredients, Latam &amp; Asia Consumer and Chile) from a challenging and highly competitive market.
Strategy — nothing revolutionary; back to basics
FSF’s strategic review reveal is broadly consistent with pre-signalled themes, including: putting greater emphasis on its “core product” offerings by focussing on ‘value over volume’ and prioritising NZ milk pools. Under the new operating model, FSF will move from two primary businesses (Ingredients, and Consumer &amp; Foodservice) to three geographic focussed, customer facing business divisions with the key objective being to create a leaner, ‘go-to-market’ operating model. We support a more streamlined, focussed business which has been arguably dictated by necessity. The focus now turns to delivery.
Where to from here? Earnings and dividend outlook
FSF provided first time FY20 EPS guidance of 15–25cps, a three year plan for 40cps and five year plan 50cps. Targets don’t appear unrealistic at first glance, taking earnings back to recent levels (FY16/17). However, performance over the past few years has continued to underwhelm, hence materially improved execution is required to get confidence this recovery is achievable. Little detail has also been provided in terms of the medium-term pathway and key drivers.
FSF revised its dividend payout to 40–60% of reported NPAT (prior 65–75%), with the intention to re-commence dividends in FY20 (subject to earnings and capital requirements). We view the lower policy as prudent in light of the co-op structure and task ahead to revitalise and turnaround the business trajectory.&nbsp;

Investment View
Fonterra is in the early stages of material strategic change following recent underperformance. Early progress has been made to improve its balance sheet, now the focus turns to earnings. Management has multiple pressure points to tackle and coupled with volatile input prices and competitive markets make this a complex task. Unitholder and shareholder conflicts also remain an issue for FSF investors.&nbsp;

Chelsea Leadbetter, CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262

Fonterra: FY19 Result — Bitter, Bitter, Sweet

New Zealand

Fonterra Cooperative Group Ltd is a New Zealand multinational dairy co-operative and its farmer shareholders are the suppliers of milk to Fonterra in New Zealand. The Company operates Fonterra Shareholders' Fund, which provides additional financial flexibility for farmer shareholders who would have the opportunity to sell economic rights of shares to the fund.

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Fonterra Shareholders Fund (FSF NZ)

Dairy Sector: Counting Carbon Emissions

Dairy Sector Counting Carbon Emissions The environmental impact of the dairy sector is gaining increasing government/regulatory focus as well as...

Forsyth Barr

Fonterra: FY19 Result — Bitter, Bitter, Sweet

Fonterra FY19 Result — Bitter, Bitter, Sweet Fonterra’s (FSF) FY19 result had a plethora of moving parts, with some early bright spots from its...

Forsyth Barr

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