Fonterra (ASX:FSF) share price gains amid profit slide and flagged Australian arm IPO

Exciting times might be ahead for Fonterra Australia.

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The Fonterra Shareholders’ Fund (ASX: FSF) share price is in the green this morning following the release of the company’s results for financial year 2021 (FY21).

Within its results, Fonterra announced it’s considering divesting its international operations, with Fonterra Australia potentially undergoing an Initial Public Offering (IPO).

At the time of writing, the Fonterra share price is $3.77, 3.29% higher than its previous close.

A quick note: Fonterra reports in New Zealand Dollars. All dollar amounts have been converted to Australian Dollars at the current exchange rate of AUD$1 to NZD$1.03.

Fonterra share price higher despite lower earnings

Here’re the key performance metrics for Fonterra’s FY21:

  • $578.96 million of reported profits after tax, down $57.99 million on that of FY20.
  • Around $20.4 billion of revenue, up 1% on the previous financial year’s.
  • Normalised earnings per share of 33 cents.
  • 14 cent final dividend, bringing total dividends for FY21 to 19 cents.
  • $11.21 billion of total payout to New Zealand farmers.

Over FY21, the average farmgate price of milk solids paid by Fonterra was $7.29 per kilogram.

Over FY21, the company reduced its net debt by $842.82 million. As of 30 June, it has around $3.67 billion of debt.  

Fonterra’s divestment intentions

It might not be its earnings that have got the Fonterra share price in the spotlight today.

All eyes are on Fonterra following news it intends to divest its Australian and Chilean operations to focus on building its New Zealand business.

The company believes demand for New Zealand milk will increase from now until 2030 due to its quality and sustainability. However, it also expects the country’s milk production to drop or remain flat.

Therefore, it plans to divest its Chilean dairy brand, Soprole, and its subsidiary, Prolesur. Fonterra will start the process to divest its integrated investment in Chile.

Meanwhile, the company is in discussions about the future of Fonterra Australia.

Fonterra stated Australia continues to be an important export market for its products and is considering what the best ownership structure will be for the business.

One option is to list Fonterra Australia, with Fonterra retaining a significant stake.

On the divestment intention, Fonterra’s CEO, Miles Hurrell commented:

We see both these moves as critical to enabling greater focus on our New Zealand milk and, importantly, allowing us to free up capital, much of which is intended to be returned to shareholders.

Through its planned divestments and improved earnings, Fonterra intends to return around $966.5 million to shareholders by FY24. It also plans to have around $1.93 billion of additional capital available for investment in growth and further returns to shareholders.

Possible changes to shareholding structure

The company also released a proposed change to its shareholding structure today.

A new maximum shareholding requirement would be set at 4-times milk supply, compared to the current 2-times milk supply. This is intended to strike a balance between supporting liquidity in the farmer-only market while avoiding a significant concentration of ownership.

The company’s also considering allowing more types of farmers to buy shares, extending exit provisions, and easing entry provisions.

The Fonterra Shareholders’ Fund would also be capped and the Fonterra Shareholders’ Market would continue to operate as a farmer-only market, but market participants won’t be able to exchange shares into units in the fund.

The new structure is subject to shareholder approval.

What did management say?

Hurrell commented on the news driving the Fonterra share price today, saying:

Although the higher milk price and tightening margins put pressure on earnings in the final quarter, this is a strong overall business performance…

The work we’ve done as part of the 2019 strategic reset means we’re well placed to take advantage of favourable industry dynamics. Growing global demand for dairy coupled with constrained supply has resulted in high prices for our milk. Our resilient supply chain has allowed us to get products to market and the healthy demand for our farmers’ New Zealand milk has seen a record shipping year for the Co-op.

We’ve continued to reshape our business and the sales of our joint venture farms and wholly-owned farming hubs in China. Our continued focus is to get our New Zealand milk to the world.

What’s next for Fonterra?

The Fonterra share price might be being boosted by its positive outlook for FY22.

Over FY22, Fonterra will be focusing on reducing its carbon footprint and returning value to its shareholders.

The company’s earnings guidance for FY22 is between 24 and 38 cents per share – pretty much in line with its FY21 earnings.

It also reaffirmed its forecast farmgate milk price range is between $7.01 and $8.46 per kilogram of milk solids, with a midpoint of $7.73 per kilogram of milk solids.

Fonterra notes that New Zealand’s dairy industry is the lowest carbon producing industry of its kind.

However, it will be working to reduce the methane output of dairy production through research and development initiatives.  

By FY30, the company wants to achieve average farmgate milk prices of between $6.28 and $7.25 per kilogram of milk solids for the decade ending FY30.

It also wants to increase its operating profits by 40% to 50% on that of FY21.

Fonterra share price snapshot

2021 hasn’t been a good year for the Fonterra share price on the ASX.

It has fallen 10% year to date. However, it is 3% higher than it was 12-months ago.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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