FONTERRA ORD UNIT announces profit result: Are the shares a buy?

This morning New Zealand dairy co-operative FONTERRA ORD UNIT (ASX: FSF) announced normalised earnings before income tax of NZ$665 million on revenues of $NZ8.8 billion for the six months ending 31 January 2016.

Fonterra still carries net debt of NZ$6.9 billion and expects full year earnings in the region of NZ45-55 cents per share. Shares in the Fonterra shareholders fund (FSF) effectively track the farming co-operative’s earnings and dividend.

The board declared an NZ20 cents dividend and expects the full year payout to total NZ40 cents per shares.

Total revenues were marginally down compared to the prior corresponding period due to weak dairy prices, however, earnings soared due to improved profitability on cost cutting and the product mix.

In a similar way to oil prices, dairy prices have been hammered recently due to a global supply and demand imbalance, which has placed pressure on the New Zealand dairy farming community.

The long-term demand for dairy products is still expected to grow at about 2 to 3 per cent per year around the world, as population growth and the growing Asian middle class support demand.

Other dairy-based foodstuff producers with leverage to the growing demand from the Asian middle class have gone berserk on the ASX over the past year. These include Bellamy’s Australia Ltd (ASX: BAL) up 300%, and a2 Milk Company Ltd (Australia) (ASX: A2M), up 214%.

The dismal return of negative 8% for Fonterra shareholders showing just how tough conditions have been for NZ dairy farmers as European farmers in particular ramp up the competition.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

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