New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Fonterra Shareholders Fund / Equity Bottom-Up

<h2>Fonterra</h2>
1H20 Result — Making Moo-ve's
RESEARCH&nbsp;INSIGHTS
Fonterra (FSF) reported a strong EPS recovery in 1H20, with signs of continued improvement and discipline following its strategic reset, however, near-term outlook is clouded by uncertainties around the global impact of COVID-19 and drought conditions in Australasia. There were a number of positives in 1H20 including (1) debt reduction; (2) lower capex and opex; (3) strong uplift in Consumer and Foodservice earnings; and (4) positive net cash flow, which outweighed weakness in NZ Ingredients given product mix pressures. FY20 EPS guidance was retained to reflect the uncertainty. The current run-rate suggests upside risk to our forecasts, although things can change quickly given a number of dynamics outside of FSF's control (namely changing supply and demand dynamics globally), amplified by uncertainty from COVID-19.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">FSF</td>
<td style="width: 48pt;">Financials:Jul/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZNZ$3.78$3.15</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">272.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">350.2</td>
<td style="text-align: left; width: 43.2pt;">507.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">573.4&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">8.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1612.0m</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">16.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.7&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">31.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">35.6&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">15.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">15.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">13.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$6,093m</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-28.9</td>
<td style="text-align: left; width: 42.6pt;">28.8</td>
<td style="text-align: left; width: 43.2pt;">45.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">12.9&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">22.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">12.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">174.7k (NZ$679k)</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">17.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.9</td>
<td style="text-align: left; width: 42.6pt;">1.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">1.5&nbsp;</td>
</tr>
<tr>
<td></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">0</td>
<td style="text-align: left; width: 42.6pt;">0</td>
<td style="text-align: left; width: 43.2pt;">0</td>
<td style="text-align: left; width: 48pt;">0</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.3&nbsp;</td>
</tr>
<tr>
<td></td>
<td style="width: 48pt;"></td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.4</td>
<td style="text-align: left; width: 48pt;">4.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.3&nbsp;</td>
</tr>
</tbody>
</table>
Strong start to FY20, with a number of internal initiatives delivering early positive signs, albeit helped by weak base
FSF's 1H20 result was operationally strong (off a weak comparative) with normalised EPS of 18cps, up significantly from 4cps in the prior year and well ahead of our forecasts. It is an encouraging start following a suite of strategic changes, and particularly in the context of a high Farmgate Milk Price (NZ$7–$7.60) and drought conditions in Australasia.
FSF reported a step-change in Consumer &amp; Foodservices (EBIT up +105%), as a result of strong demand for products in Greater China and Asia. The result also saw a steep decline in both capex and opex as strategic initiatives begin to deliver benefits. Dampening the uplift was a weak performance in NZ Ingredients (EBIT down -5%), driven by a -17% decline in gross margin per MT in non-reference products as a result of higher sales volume of UHT cream (a low margin ingredients product).
Guidance retained in light of uncertainties; strong 1H leaves it well placed
Despite the strong start to FY20,&nbsp;FSF&nbsp;has maintained its guidance for underlying&nbsp;EPS&nbsp;of 15–25cps. The company is tracking well to the top end,&nbsp;although retains "prudence" given the high level of uncertainties in the current environment.&nbsp;FSF&nbsp;also flagged an expected&nbsp;EBITDA&nbsp;impact of NZ$40–50m on its China&nbsp;Foodservice&nbsp;business from&nbsp;COVID-19. At this point we leave our forecasts unchanged&nbsp;— the current run-rate suggests upside risk, although uncertainty leaves us more cautious.
Strategic review and balance sheet&nbsp;— moving in the right direction, but more work to do
FSF is in the midst of a material strategic overhaul, targeted at lowering debt levels and improving earnings/margins, both of which have been key areas of challenge in recent years. The 1H20 result showed early progress, however, there is more work to do. Net debt saw a notable decrease in 1H20 to NZ$5.8bn from NZ$7.4bn, however, gearing levels of 46.9% remain outside of its target range (40–45%). This reflects the improved earnings/cashflow result, material asset sales and no interim dividend. Going forward, FSF has signalled pending sales of China Farms and DPA Brazil and hopes to reinstate a dividend at the FY20 result. There remain a plethora of moving parts, hence, the latter will be contingent on results.
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Fonterra
1H20 Result — Making Moo-ve's
RESEARCH&nbsp;INSIGHTS
Fonterra (FSF) reported a strong EPS recovery in 1H20, with signs of continued improvement and discipline following its strategic reset, however, near-term outlook is clouded by uncertainties around the global impact of COVID-19 and drought conditions in Australasia. There were a number of positives in 1H20 including (1) debt reduction; (2) lower capex and opex; (3) strong uplift in Consumer and Foodservice earnings; and (4) positive net cash flow, which outweighed weakness in NZ Ingredients given product mix pressures. FY20 EPS guidance was retained to reflect the uncertainty. The current run-rate suggests upside risk to our forecasts, although things can change quickly given a number of dynamics outside of FSF's control (namely changing supply and demand dynamics globally), amplified by uncertainty from COVID-19.
         


NZX Code
FSF
Financials:Jul/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZNZ$3.78$3.15
NPAT* (NZ$m)
272.0&nbsp;
350.2
507.9&nbsp;
573.4&nbsp;
EV/EBITDA
8.9&nbsp;
9.1&nbsp;
8.1&nbsp;
7.8&nbsp;


Issued shares
1612.0m
EPS* (NZc)
16.9&nbsp;
21.7&nbsp;
31.5&nbsp;
35.6&nbsp;
EV/EBIT
15.1&nbsp;
15.7&nbsp;
13.2&nbsp;
12.3&nbsp;


Market cap
NZ$6,093m
EPS growth* (%)
-28.9
28.8
45.0&nbsp;
12.9&nbsp;
PE
22.4&nbsp;
17.4&nbsp;
12.0&nbsp;
10.6&nbsp;


Avg daily turnover
174.7k (NZ$679k)
DPS (NZc)
0.0&nbsp;
9.0&nbsp;
17.0&nbsp;
20.0&nbsp;
Price/NTA
1.9
1.7&nbsp;
1.6&nbsp;
1.5&nbsp;




Imputation (%)
0
0
0
0
Cash div yld (%)
0.0&nbsp;
2.4&nbsp;
4.5&nbsp;
5.3&nbsp;




*Based on normalised profits


Gross div yld (%)
0.0&nbsp;
2.4
4.5&nbsp;
5.3&nbsp;



Strong start to FY20, with a number of internal initiatives delivering early positive signs, albeit helped by weak base
FSF's 1H20 result was operationally strong (off a weak comparative) with normalised EPS of 18cps, up significantly from 4cps in the prior year and well ahead of our forecasts. It is an encouraging start following a suite of strategic changes, and particularly in the context of a high Farmgate Milk Price (NZ$7–$7.60) and drought conditions in Australasia.
FSF reported a step-change in Consumer &amp; Foodservices (EBIT up +105%), as a result of strong demand for products in Greater China and Asia. The result also saw a steep decline in both capex and opex as strategic initiatives begin to deliver benefits. Dampening the uplift was a weak performance in NZ Ingredients (EBIT down -5%), driven by a -17% decline in gross margin per MT in non-reference products as a result of higher sales volume of UHT cream (a low margin ingredients product).
Guidance retained in light of uncertainties; strong 1H leaves it well placed
Despite the strong start to FY20,&nbsp;FSF&nbsp;has maintained its guidance for underlying&nbsp;EPS&nbsp;of 15–25cps. The company is tracking well to the top end,&nbsp;although retains "prudence" given the high level of uncertainties in the current environment.&nbsp;FSF&nbsp;also flagged an expected&nbsp;EBITDA&nbsp;impact of NZ$40–50m on its China&nbsp;Foodservice&nbsp;business from&nbsp;COVID-19. At this point we leave our forecasts unchanged&nbsp;— the current run-rate suggests upside risk, although uncertainty leaves us more cautious.
Strategic review and balance sheet&nbsp;— moving in the right direction, but more work to do
FSF is in the midst of a material strategic overhaul, targeted at lowering debt levels and improving earnings/margins, both of which have been key areas of challenge in recent years. The 1H20 result showed early progress, however, there is more work to do. Net debt saw a notable decrease in 1H20 to NZ$5.8bn from NZ$7.4bn, however, gearing levels of 46.9% remain outside of its target range (40–45%). This reflects the improved earnings/cashflow result, material asset sales and no interim dividend. Going forward, FSF has signalled pending sales of China Farms and DPA Brazil and hopes to reinstate a dividend at the FY20 result. There remain a plethora of moving parts, hence, the latter will be contingent on results.
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262


Fonterra Shareholders Fund

Fonterra:1H20 Result — Making Moo-Ve's