The Fonterra Shareholders' Fund (ASX: FSF) share price will be one to watch this morning after the release of a market update.
What did Fonterra announce?
This morning the global dairy company reconfirmed its revised underlying earnings guidance for the 12 months ended July 31.
This means Fonterra expects to report earnings per share in the range of 10 to 15 NZ cents per share.
However, due to significant adverse one-off accounting adjustments which total approximately NZ$820 million to NZ$860 million, Fonterra expects to make a reported loss of NZ$590 million to NZ$675 million this year. This equates to a disappointing 37 to 42 NZ cents loss per share.
Chief Executive Officer, Miles Hurrell, explained: "Since September 2018 we've been re-evaluating all investments, major assets and partnerships to ensure they still meet the Co-operative's needs. We are leaving no stone unturned in the work to turn our performance around. We have taken a hard look at our end-to-end business, including selling and reviewing the future of a number of assets that are no longer core to our strategy. The review process has also identified a small number of assets that we believe are overvalued, based on the outlook for their expected future returns."
These include its DPA Brazil business, its Venezuelan consumer business, its China Farms business, the New Zealand consumer business, and the Australian Ingredients business.
In South America, the DPA Brazil will be impaired by approximately NZ$200 million due to the economic conditions in Brazil. Elsewhere, the company has made an accounting adjustment of approximately NZ$135 million relating primarily to the release of the adverse accumulated foreign currency translation reserve in Venezuela following the sale of its businesses.
The carrying value for the China Farms business will be impaired by approximately NZ$200 million due to the slower than expected operating performance.
In New Zealand the compounding effect of operational challenges, along with a slower than planned recovery in its market share has resulted in Fonterra reassessing the consumer business' future earnings. It has been written down by approximately NZ$200 million.
Finally, the company has written off the goodwill in the Australian Ingredients business, resulting in a one-off impact of approximately NZ$70 million. This follows prolonged drought, reduced domestic milk supply, and aggressive competition in the Australian dairy industry.
Dividend suspended.
In light of these significant write-downs, chairman John Monaghan revealed that the board has brought forward its decision on the full year dividend for FY 2019 and decided that there will be no dividend this year.
Mr Monaghan explained: "We have made the call not to pay a dividend for FY19. Our owners' livelihoods were front of mind when making this decision and we are well aware of the challenging environment farmers are operating in at the moment."
Adding: "Ultimately, we are charged with acting in the best long-term interests of the Co-op. The underlying performance of the business is in-line with the latest earnings guidance, but we cannot ignore the reported loss of $590 – $675 million once you look at the overall picture. Not paying a dividend for the FY19 financial year is part of our stated intention to reduce the Co-op's debt, which is in everybody's long-term interests."
In light of this update, I would suggest investors stick with infant formula and fresh milk company A2 Milk Company Ltd (ASX: A2M) for growth and consider horticulture company Costa Group Holdings Ltd (ASX: CGC) for income.
