New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Fonterra Shareholders Fund / Equity Bottom-Up

<h2>Fonterra First Time FY23 Earnings Guidance</h2>
Fonterra has this morning provided wide first-time FY23 earnings guidance for NZ 30-45cps. At the mid-point (NZ 37.5cps) this is modestly (~+6%) ahead of our and consensus expectations (~NZ 35cps). The guidance range is unsurprisingly wide reflecting the ongoing volatile backdrop but with elevated milk prices (ahead of our current expectations) we view this as a solid outcome; highlighting the ongoing robust earnings execution from the Co-op. Fonterra has also lifted its FY23 Farmgate Milk Price (FGMP) mid-point +NZ 50cps to NZ$9.50.
Key points
<ul>
<li>First time FY23 earnings guidance: FY23 EPS guidance for NZ 30-45cps (mid-point of NZ 37.5cps). Against a volatile backdrop the guidance range is unsurprisingly wide but at the mid-point represents +25% growth versus FY22 and is modestly ahead of our and consensus expectations (Forsyth Barr; NZ 35.3cps, consensus; NZ 35.2cps). Limited insights have been provided into drivers but Fonterra expects (1) ongoing favourable ingredients margins, and (2) a recovery in key markets from COVID-19 which have experienced margin pressures.</li>
<li>FGMP range lifted: FY23 milk price mid-point lifted +NZ 50cps to NZ$9.50 from NZ$9.00 given (1) ongoing strong demand for dairy, (2) limited global supply increases in light of elevated farm input costs, and (3) the current USD strength. The revised range is now NZ$8.75-10.25 per kgMS (versus its previous range set on 26 May 2022 of NZ$8.25-9.75 per kgMS). The wide range reflects ongoing volatility in global milk prices but if achieved will be a record high milk price and ahead of the FY22 mid-point of NZ$9.30 (previous high was NZ$8.40 in FY14).</li>
<li>Long-term targets reiterated: Fonterra has retained its long-term aspirations as set out at its strategy day in September 2021 but highlighted (as expected) the path is unlikely to be linear. Long-term (FY30) targets are for EPS of NZ 55-65cps, DPS of NZ 40-45cps and return on capital of 9-10%. This compares to Fonterra’s peak earnings in FY10/11 of ~NZ 60cps. We currently take a more conservative stance in our forecasts at this point (EPS of NZ 45-50cps) until we see continued ongoing evidence of execution.</li>
</ul>
FY22 and FY23 summary EPS expectations
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 99.25pt; height: 11.35pt;"></td>
<td style="width: 17.05pt; height: 11.35pt;">
FY22
</td>
<td style="width: 58pt; height: 11.35pt;">
FY23
</td>
<td style="width: 57pt; height: 11.35pt;">
% change
</td>
</tr>
<tr>
<td style="width: 99.25pt; height: 11.35pt;">
Guidance mid-point
</td>
<td style="width: 17.05pt; height: 11.35pt;">
30.0
</td>
<td style="width: 58pt; height: 11.35pt;">
37.5
</td>
<td style="width: 57pt; height: 11.35pt;">
25.0%
</td>
</tr>
<tr>
<td style="width: 99.25pt; height: 11.35pt;">
FB
</td>
<td style="width: 17.05pt; height: 11.35pt;">
30.8
</td>
<td style="width: 58pt; height: 11.35pt;">
35.3
</td>
<td style="width: 57pt; height: 11.35pt;">
14.6%
</td>
</tr>
<tr>
<td style="width: 99.25pt; height: 11.35pt;">
Consensus
</td>
<td style="width: 17.05pt; height: 11.35pt;">
32.2
</td>
<td style="width: 58pt; height: 11.35pt;">
35.2
</td>
<td style="width: 57pt; height: 11.35pt;">
9.3%
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Company reports, Bloomberg

Fonterra First Time FY23 Earnings Guidance
Fonterra has this morning provided wide first-time FY23 earnings guidance for NZ 30-45cps. At the mid-point (NZ 37.5cps) this is modestly (~+6%) ahead of our and consensus expectations (~NZ 35cps). The guidance range is unsurprisingly wide reflecting the ongoing volatile backdrop but with elevated milk prices (ahead of our current expectations) we view this as a solid outcome; highlighting the ongoing robust earnings execution from the Co-op. Fonterra has also lifted its FY23 Farmgate Milk Price (FGMP) mid-point +NZ 50cps to NZ$9.50.
Key points

First time FY23 earnings guidance: FY23 EPS guidance for NZ 30-45cps (mid-point of NZ 37.5cps). Against a volatile backdrop the guidance range is unsurprisingly wide but at the mid-point represents +25% growth versus FY22 and is modestly ahead of our and consensus expectations (Forsyth Barr; NZ 35.3cps, consensus; NZ 35.2cps). Limited insights have been provided into drivers but Fonterra expects (1) ongoing favourable ingredients margins, and (2) a recovery in key markets from COVID-19 which have experienced margin pressures.
FGMP range lifted: FY23 milk price mid-point lifted +NZ 50cps to NZ$9.50 from NZ$9.00 given (1) ongoing strong demand for dairy, (2) limited global supply increases in light of elevated farm input costs, and (3) the current USD strength. The revised range is now NZ$8.75-10.25 per kgMS (versus its previous range set on 26 May 2022 of NZ$8.25-9.75 per kgMS). The wide range reflects ongoing volatility in global milk prices but if achieved will be a record high milk price and ahead of the FY22 mid-point of NZ$9.30 (previous high was NZ$8.40 in FY14).
Long-term targets reiterated: Fonterra has retained its long-term aspirations as set out at its strategy day in September 2021 but highlighted (as expected) the path is unlikely to be linear. Long-term (FY30) targets are for EPS of NZ 55-65cps, DPS of NZ 40-45cps and return on capital of 9-10%. This compares to Fonterra’s peak earnings in FY10/11 of ~NZ 60cps. We currently take a more conservative stance in our forecasts at this point (EPS of NZ 45-50cps) until we see continued ongoing evidence of execution.

FY22 and FY23 summary EPS expectations





FY22


FY23


% change




Guidance mid-point


30.0


37.5


25.0%




FB


30.8


35.3


14.6%




Consensus


32.2


35.2


9.3%




Source: Forsyth Barr analysis, Company reports, Bloomberg

Fonterra: First Time FY23 Earnings Guidance