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 (FSF)&nbsp; 1H22 Result – Initial Impressions</h2>
Fonterra (FSF) reported a 1H22 result materially ahead of our and consensus expectations, with normalised EBIT of NZ$607m (FB; NZ$403m, consensus; NZ$418m) and underlying EPS of NZ 22cps (FB; NZ 14cps, consensus; NZ 18cps). The beat versus our expectations was twofold, (1) higher gross margins than expected (14.6% versus our estimate of 13.7%), helped by favourable milk price relativities, and (2) ongoing opex discipline despite inflationary pressures with opex -6% below our expectations and -5% below consensus. Despite the strong 1H22 result, FSF has retained its FY22 EPS guidance for EPS of NZ 25-35cps, implying ~NZ 8cps earnings in 2H22 (versus NZ 22cps in 1H22).
Points of interest
<ul>
<li>Divisional detail: Favourable milk price relativities (reference product vs non-reference product prices) are providing resilience in its Ingredients business with EBIT +NZ$117m ahead of 1H21. That said, consistent with Q1 trends milk price headwinds are placing pressure on Consumer and Foodservice margins with EBIT down -NZ$39m and -NZ$169m relative to 1H21 respectively.</li>
<li>Balance sheet – full year expectations in-line with targets: The seasonal nature of FSF’s results makes balance sheet comparisons difficult but FSF reported a gearing ratio of 44.1%, down from 47.3% at 1H22. Given the inherent seasonality, FSF expects a reduction through 2H with an FY22 target of 34.5%. This target (if achieved) is materially below recent history and in-line with FSF’s medium to longer-term expectation of &lt;35%.</li>
<li>Interim dividend – below expectations: FSF declared an interim dividend of NZ 5cps, a 23% payout ratio on 1H22 EPS. This was below both our and consensus expectations (NZ 7cps).</li>
<li>Strategic updates: Limited detail but FSF stated it is “continuing to make progress” on the divestment of its Chilean business, ownership review of its Australian business and retained its intention to return around NZ$1bn of capital to shareholders and unitholders by FY24. Its longer-term earnings, dividend and return on capital targets are also unchanged. At this juncture, we take a more conservative stance towards FSF’s medium/longer term earnings expectations.</li>
<li>FY22 outlook: FSF has retained its FY22 EPS guidance for NZ 25-35cps (original guidance at its FY21 result was NZ 25-40cps). This implies ~NZ 8cps in 2H22 reflecting the seasonal nature of FSF’s business, the persistent milk price headwinds, and is broadly consistent with trends experienced in FY21 (1H21 EPS of NZ 25cps and 2H22 EPS of NZ 9cps). Our current forecasts are for NZ 34.2cps and consensus of NZ 34.4cps, implying downside risk to market expectations (as expected heading into today’s result). FSF has also retained its recently lifted milk price payout midpoint of NZ$9.60 per KgMS</li>
</ul>
Investor briefing – 1:45pm NZT
Requires pre-registration;&nbsp;<a href="http://pro.ccs.gcs.nadq.pub/redirect/MjAyMjAzMTE5ODVjN2U5MS0zY2M0LTQ3ODctOTUwMS05MzZjNjBkZjIxOTgtUDAyfG1hdHQubW9udGdvbWVyaWVAZm9yc3l0aGJhcnIuY28ubno=/?url=aHR0cDovL2FwYWMuZGlyZWN0ZXZlbnRyZWcuY29tL3JlZ2lzdHJhdGlvbi9ldmVudC8xMjQxNDc5" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://pro.ccs.gcs.nadq.pub/redirect/MjAyMjAzMTE5ODVjN2U5MS0zY2M0LTQ3ODctOTUwMS05MzZjNjBkZjIxOTgtUDAyfG1hdHQubW9udGdvbWVyaWVAZm9yc3l0aGJhcnIuY28ubno%3D/?url%3DaHR0cDovL2FwYWMuZGlyZWN0ZXZlbnRyZWcuY29tL3JlZ2lzdHJhdGlvbi9ldmVudC8xMjQxNDc5&amp;source=gmail&amp;ust=1647563618377000&amp;usg=AOvVaw2KdVPQFzmtceP5yzkoc2rt" rel="noopener">http://apac.directeventreg.com/registration/event/1241479&nbsp;</a>or access via webcast&nbsp;<a href="http://pro.ccs.gcs.nadq.pub/redirect/MjAyMjAzMTE5ODVjN2U5MS0zY2M0LTQ3ODctOTUwMS05MzZjNjBkZjIxOTgtUDAyfG1hdHQubW9udGdvbWVyaWVAZm9yc3l0aGJhcnIuY28ubno=/?url=aHR0cHM6Ly9lZGdlLm1lZGlhLXNlcnZlci5jb20vbW1jL3AveHc4Z3p3dzU=" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://pro.ccs.gcs.nadq.pub/redirect/MjAyMjAzMTE5ODVjN2U5MS0zY2M0LTQ3ODctOTUwMS05MzZjNjBkZjIxOTgtUDAyfG1hdHQubW9udGdvbWVyaWVAZm9yc3l0aGJhcnIuY28ubno%3D/?url%3DaHR0cHM6Ly9lZGdlLm1lZGlhLXNlcnZlci5jb20vbW1jL3AveHc4Z3p3dzU%3D&amp;source=gmail&amp;ust=1647563618377000&amp;usg=AOvVaw2tcjchYeguLWYQ3fewTKCa" rel="noopener">here</a>
1H22 result summary
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
NZ$m
</td>
<td style="width: 44.9pt; height: 12.75pt;">
1H21
</td>
<td style="width: 51.8pt; height: 12.75pt;">
1H22
</td>
<td style="width: 51.8pt; height: 12.75pt;">
% chg
</td>
<td style="width: 51.8pt; height: 12.75pt;">
FB
</td>
<td style="width: 51.8pt; height: 12.75pt;">
% diff
</td>
<td style="width: 64.8pt; height: 12.75pt;">
Consensus
</td>
<td style="width: 51.8pt; height: 12.75pt;">
% diff
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Revenue
</td>
<td style="width: 44.9pt; height: 12.75pt;">
9,597
</td>
<td style="width: 51.8pt; height: 12.75pt;">
10,588
</td>
<td style="width: 51.8pt; height: 12.75pt;">
10%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
10,200
</td>
<td style="width: 51.8pt; height: 12.75pt;">
4%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
10,190
</td>
<td style="width: 51.8pt; height: 12.75pt;">
4%
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Normalised gross profit
</td>
<td style="width: 44.9pt; height: 12.75pt;">
1,651
</td>
<td style="width: 51.8pt; height: 12.75pt;">
1,549
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-6%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
1,400
</td>
<td style="width: 51.8pt; height: 12.75pt;">
11%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
1,437
</td>
<td style="width: 51.8pt; height: 12.75pt;">
8%
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Normalised GP margin
</td>
<td style="width: 44.9pt; height: 12.75pt;">
17.2%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
14.6%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-257bp
</td>
<td style="width: 51.8pt; height: 12.75pt;">
13.7%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
90bp
</td>
<td style="width: 64.8pt; height: 12.75pt;">
14.1%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
53bp
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Normalised EBITDA
</td>
<td style="width: 44.9pt; height: 12.75pt;">
1,004
</td>
<td style="width: 51.8pt; height: 12.75pt;">
921
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-8%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
733
</td>
<td style="width: 51.8pt; height: 12.75pt;">
26%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
737
</td>
<td style="width: 51.8pt; height: 12.75pt;">
25%
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Normalised EBIT
</td>
<td style="width: 44.9pt; height: 12.75pt;">
684
</td>
<td style="width: 51.8pt; height: 12.75pt;">
607
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-11%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
403
</td>
<td style="width: 51.8pt; height: 12.75pt;">
51%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
418
</td>
<td style="width: 51.8pt; height: 12.75pt;">
45%
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Normalised EBIT margin
</td>
<td style="width: 44.9pt; height: 12.75pt;">
7.1%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
5.7%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-139bp
</td>
<td style="width: 51.8pt; height: 12.75pt;">
4.0%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
178bp
</td>
<td style="width: 64.8pt; height: 12.75pt;">
4.1%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
163bp
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Underlying EPS (NZ cps)
</td>
<td style="width: 44.9pt; height: 12.75pt;">
25
</td>
<td style="width: 51.8pt; height: 12.75pt;">
22
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-13%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
14
</td>
<td style="width: 51.8pt; height: 12.75pt;">
58%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
18
</td>
<td style="width: 51.8pt; height: 12.75pt;">
22%
</td>
</tr>
<tr>
<td style="width: 134.7pt; height: 12.75pt;">
Interim dividend (NZ cps)
</td>
<td style="width: 44.9pt; height: 12.75pt;">
5
</td>
<td style="width: 51.8pt; height: 12.75pt;">
5
</td>
<td style="width: 51.8pt; height: 12.75pt;">
0%
</td>
<td style="width: 51.8pt; height: 12.75pt;">
7
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-29%
</td>
<td style="width: 64.8pt; height: 12.75pt;">
7
</td>
<td style="width: 51.8pt; height: 12.75pt;">
-29%
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Company reports

Fonterra (FSF)&nbsp; 1H22 Result – Initial Impressions
Fonterra (FSF) reported a 1H22 result materially ahead of our and consensus expectations, with normalised EBIT of NZ$607m (FB; NZ$403m, consensus; NZ$418m) and underlying EPS of NZ 22cps (FB; NZ 14cps, consensus; NZ 18cps). The beat versus our expectations was twofold, (1) higher gross margins than expected (14.6% versus our estimate of 13.7%), helped by favourable milk price relativities, and (2) ongoing opex discipline despite inflationary pressures with opex -6% below our expectations and -5% below consensus. Despite the strong 1H22 result, FSF has retained its FY22 EPS guidance for EPS of NZ 25-35cps, implying ~NZ 8cps earnings in 2H22 (versus NZ 22cps in 1H22).
Points of interest

Divisional detail: Favourable milk price relativities (reference product vs non-reference product prices) are providing resilience in its Ingredients business with EBIT +NZ$117m ahead of 1H21. That said, consistent with Q1 trends milk price headwinds are placing pressure on Consumer and Foodservice margins with EBIT down -NZ$39m and -NZ$169m relative to 1H21 respectively.
Balance sheet – full year expectations in-line with targets: The seasonal nature of FSF’s results makes balance sheet comparisons difficult but FSF reported a gearing ratio of 44.1%, down from 47.3% at 1H22. Given the inherent seasonality, FSF expects a reduction through 2H with an FY22 target of 34.5%. This target (if achieved) is materially below recent history and in-line with FSF’s medium to longer-term expectation of &lt;35%.
Interim dividend – below expectations: FSF declared an interim dividend of NZ 5cps, a 23% payout ratio on 1H22 EPS. This was below both our and consensus expectations (NZ 7cps).
Strategic updates: Limited detail but FSF stated it is “continuing to make progress” on the divestment of its Chilean business, ownership review of its Australian business and retained its intention to return around NZ$1bn of capital to shareholders and unitholders by FY24. Its longer-term earnings, dividend and return on capital targets are also unchanged. At this juncture, we take a more conservative stance towards FSF’s medium/longer term earnings expectations.
FY22 outlook: FSF has retained its FY22 EPS guidance for NZ 25-35cps (original guidance at its FY21 result was NZ 25-40cps). This implies ~NZ 8cps in 2H22 reflecting the seasonal nature of FSF’s business, the persistent milk price headwinds, and is broadly consistent with trends experienced in FY21 (1H21 EPS of NZ 25cps and 2H22 EPS of NZ 9cps). Our current forecasts are for NZ 34.2cps and consensus of NZ 34.4cps, implying downside risk to market expectations (as expected heading into today’s result). FSF has also retained its recently lifted milk price payout midpoint of NZ$9.60 per KgMS

Investor briefing – 1:45pm NZT
Requires pre-registration;&nbsp;http://apac.directeventreg.com/registration/event/1241479&nbsp;or access via webcast&nbsp;here
1H22 result summary




NZ$m


1H21


1H22


% chg


FB


% diff


Consensus


% diff




Revenue


9,597


10,588


10%


10,200


4%


10,190


4%




Normalised gross profit


1,651


1,549


-6%


1,400


11%


1,437


8%




Normalised GP margin


17.2%


14.6%


-257bp


13.7%


90bp


14.1%


53bp




Normalised EBITDA


1,004


921


-8%


733


26%


737


25%




Normalised EBIT


684


607


-11%


403


51%


418


45%




Normalised EBIT margin


7.1%


5.7%


-139bp


4.0%


178bp


4.1%


163bp




Underlying EPS (NZ cps)


25


22


-13%


14


58%


18


22%




Interim dividend (NZ cps)


5


5


0%


7


-29%


7


-29%




Source: Forsyth Barr analysis, Company reports

Fonterra (FSF): 1H22 Result – Initial Impressions