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<br>FY21 Result&nbsp;— Greener Pastures&nbsp;</h2>
<h3>RESEARCH&nbsp;INSIGHTS</h3>
<p>Fonterra (FSF) reported a solid FY21 result at the top-end of its guidance range, and ahead of our expectations. FY22 EPS guidance (NZ25cps to NZ40cps) is unsurprisingly wide reflecting; (1) ongoing COVID-19 uncertainties, and (2) potential milk price headwinds &amp; stream returns volatility. The co-op also provided extensive detail on long-term strategic priorities and targets — with themes broadly consistent with prior indications, with the focus on better utilising its NZ milk pool. Solid progress has been made following its strategic reset, however there is still more work ahead to reach its EPS targets.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/231/523/original/image_71999797421632444917288.png?1632444917" class="editor-image img-responsive" data-smartkarma-image-id="231523"></figure>
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<h3>What's changed?</h3>
</div>
<div>
<ul>
<li><strong>​​​​​​​Earnings</strong>:&nbsp;Small near-term EPS changes (+3-4%). More material changes made to dividend forecasts.</li>
</ul>
</div>
<div>
<h3>Solid FY21 result led by Greater China and Asia Pacific</h3>
</div>
<div id="m_9192533767900659588iarwe">
<p>FSF reported a solid FY21 result with EPS of NZ34cps, up +44% versus FY21. Weakness in its Ingredients segment was more than offset by strong growth and margin expansion in its Foodservice and Consumer segments.</p>
<ul>
<li>Consistent with recent periods,&nbsp;<strong>Ingredients&nbsp;</strong>was soft (EBIT -47% versus FY21) driven by lower volumes across all key regions as FSF continues to shift milk to its higher margin segments to help offset milk price headwinds.</li>
<li><strong>Foodservice</strong>&nbsp;continues to be&nbsp;the standout performer (EBIT +51% versus FY21)&nbsp;as FSF benefits from China's robust economic backdrop and strong demand for New Zealand dairy (helped by government endorsement of dairy consumption).</li>
<li>Off a low base&nbsp;<strong>Consumer&nbsp;</strong>continues to recover strongly,&nbsp;benefitting&nbsp;from COVID-19 'nesting' impacts and robust margin expansion, particularly in its Asia Pacific segment.</li>
</ul>
</div>
<div>
<h3>Long-term strategy update&nbsp;— themes remain similar, albeit substantial investment is required</h3>
</div>
<div id="m_9192533767900659588il81v">
<p>Key focus areas are; (1) extracting value from its NZ milk pool, (2) driving sustainability/environmental <wbr>improvements, and (3) shifting towards higher value product segments&nbsp;and solutions. We view&nbsp;FSF's&nbsp;targeted areas as sensible to generate increased marginal returns, particularly in a declining milk supply environment. Required capital investment will be significant (materially higher than levels today), albeit further asset sales are planned,&nbsp;and it requires continued robust execution to reach&nbsp;earnings and return targets — which are materially above current levels. We have taken a more conservative stance in our forecasts at this point.</p>
</div>
<div>
<h3>Capital structure review update&nbsp;— lives to fight another day</h3>
</div>
<div id="m_9192533767900659588ihkce">
<p>Fonterra&nbsp;provided a further update on its capital structure review, revising&nbsp;its preferred option&nbsp;— which now includes a move to a capped fund (which remains listed&nbsp;as FSF) at its current size, to protect farmer ownership and control.&nbsp;Fonterra&nbsp;intends to continue with farmer consultations over the next few weeks, with a vote on its proposal planned for its Annual Meeting in December 2021.&nbsp;</p>
</div>

Fonterra FY21 Result&nbsp;— Greener Pastures&nbsp;
RESEARCH&nbsp;INSIGHTS
Fonterra (FSF) reported a solid FY21 result at the top-end of its guidance range, and ahead of our expectations. FY22 EPS guidance (NZ25cps to NZ40cps) is unsurprisingly wide reflecting; (1) ongoing COVID-19 uncertainties, and (2) potential milk price headwinds &amp; stream returns volatility. The co-op also provided extensive detail on long-term strategic priorities and targets — with themes broadly consistent with prior indications, with the focus on better utilising its NZ milk pool. Solid progress has been made following its strategic reset, however there is still more work ahead to reach its EPS targets.


What's changed?



​​​​​​​Earnings:&nbsp;Small near-term EPS changes (+3-4%). More material changes made to dividend forecasts.



Solid FY21 result led by Greater China and Asia Pacific


FSF reported a solid FY21 result with EPS of NZ34cps, up +44% versus FY21. Weakness in its Ingredients segment was more than offset by strong growth and margin expansion in its Foodservice and Consumer segments.

Consistent with recent periods,&nbsp;Ingredients&nbsp;was soft (EBIT -47% versus FY21) driven by lower volumes across all key regions as FSF continues to shift milk to its higher margin segments to help offset milk price headwinds.
Foodservice&nbsp;continues to be&nbsp;the standout performer (EBIT +51% versus FY21)&nbsp;as FSF benefits from China's robust economic backdrop and strong demand for New Zealand dairy (helped by government endorsement of dairy consumption).
Off a low base&nbsp;Consumer&nbsp;continues to recover strongly,&nbsp;benefitting&nbsp;from COVID-19 'nesting' impacts and robust margin expansion, particularly in its Asia Pacific segment.



Long-term strategy update&nbsp;— themes remain similar, albeit substantial investment is required


Key focus areas are; (1) extracting value from its NZ milk pool, (2) driving sustainability/environmental improvements, and (3) shifting towards higher value product segments&nbsp;and solutions. We view&nbsp;FSF's&nbsp;targeted areas as sensible to generate increased marginal returns, particularly in a declining milk supply environment. Required capital investment will be significant (materially higher than levels today), albeit further asset sales are planned,&nbsp;and it requires continued robust execution to reach&nbsp;earnings and return targets — which are materially above current levels. We have taken a more conservative stance in our forecasts at this point.


Capital structure review update&nbsp;— lives to fight another day


Fonterra&nbsp;provided a further update on its capital structure review, revising&nbsp;its preferred option&nbsp;— which now includes a move to a capped fund (which remains listed&nbsp;as FSF) at its current size, to protect farmer ownership and control.&nbsp;Fonterra&nbsp;intends to continue with farmer consultations over the next few weeks, with a vote on its proposal planned for its Annual Meeting in December 2021.&nbsp;


Fonterra: FY21 Result — Greener Pastures