Wednesday 16 October 2019

Share Watch: Why Kiwis could benefit from wisdom of an Irish dairy coach


Fonterra is the world’s largest dairy exporter
Fonterra is the world’s largest dairy exporter

John Lynch

There was a time when we had to be endlessly inventive about sneaking off to watch the big sporting occasions like the World Cup or the Olympics.

The current Rugby World Cup in Japan significantly reduces the need for subterfuge, largely because of the location and timing of the games. Pretty much everything we want to see happens before noon Irish time and mobile phone technology opens up the opportunity for a keen fan to watch matches undetected. One of the big lessons this and every other rugby head knows is you don't have to be a big country to be good at the game. For proof look no further than New Zealand.

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But the masters of the oval ball aren't necessarily good at everything. Our target company this week is New Zealand's largest company (by revenues), the giant agri-business Fonterra Co-operative Group. Its recent performance shows it could benefit from a good Irish dairy sector coach.

Fonterra, with its headquarters in Auckland, is owned by New Zealand farmers and is the world's largest dairy exporter. It was created at the beginning of this century in a spate of large co-op mergers.

It became the dominant player in the New Zealand dairy industry but as several Irish examples have shown, the transformation from commodity milk producer to global nutrition specialist isn't easy and often involves locking horns with heavyweight competition like Danone and Nestle.

Fonterra's fortunes in recent years have soured following poor investments, indifferent management and a high level of debt. The company has four business platforms: ingredients (its largest), consumer, food services and Chinese farms.

The ingredients business comprises bulk and specialty dairy products such as milk powder, dairy fats, cheese and proteins, sold to food producers and distributors in 140 countries. The consumer business uses the Anchor and Mainland brands for yoghurt, milk, butter and cheese. Its food service business has a range of products for commercial kitchens and its farms in China provide fresh milk to parts of that enormous market.

The collapse of Fonterra's fortunes has shocked its 13,000 farmers who own and are investors in the group. The problem has spread beyond its struggling farmers to the economy, as the company is responsible for more than a quarter of New Zealand's exports.

Investors are unhappy with the write-down of its businesses in China, Brazil, Venezuela and Australia, and the recent scrapping of its dividend for the first time. This is not the first time Fonterra has faltered in an overseas investment. Fourteen years ago it bought a stake in a Chinese infant food processor which later was at the centre of a tainted product scandal causing the death of infants. The company was later liquidated.

When Fonterra revealed it paid the former CEO Theo Spierings NZ$4.7m (€2.7m) in bonuses and salary when he resigned last year, farmers, investors and government were furious. While revenues last year were NZ$20bn, the group is struggling, with almost NZ$7.4bn of debt and a record loss of NZ$605m. Its shares trade mid NZ$3.18, half of its value 15 months ago. Its market value is down to NZ$5.6bn compared with Ireland's leading agri-business, Kerry Group, with a market cap of €19bn.

Fonterra is looking to a strategic review. While it sold its Tip Top ice-cream brand and DFE Pharma, further sales of assets are inevitable if it wants to reduce its debt and raise fresh capital. The review includes examining its joint venture with Nestle in Brazil, closure of a nutritional plant in Australia, unlocking value in its two wholly-owned farm hubs in China and off loading its interest in a Chinese infant formula producer, Beingmate.

Indications are future focus will be on value not volume. However, the outlook for Fonterra is negative so it is not a share worth considering at this time.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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