Fonterra Announces Forecast for 2010/11

Fonterra Fair Value Share Price held at $4.52.

Fonterra today announced an opening forecast payout before retentions for the 2010/11 season of $6.90-$7.10. This payout combines a forecast Milk Price of $6.60 per kilogram of milksolids (kgMS) and forecast Distributable Profit of 30-50 cents per share.

Fonterra Chairman Sir Henry van der Heyden said the opening Milk Price forecast represented an increase of 50 cents on the forecast Milk Price for the current (2009/10) season.

Sir Henry said the Board was forecasting a Distributable Profit for 2010/11 of 30-50 cents a share, although an updated forecast will follow the Group’s annual budgeting process in late July. He said that the Board currently intends to make retentions from this Distributable Profit, in line with Fonterra’s dividend policy which is to retain 25-35% of total Distributable Profit in the Co-operative.

Based on these forecasts and targets, Fonterra farmer-shareholders on average would receive a total payout before retentions of $6.90-$7.10 for each kilogram of milksolids backed by a Fonterra share.

Sir Henry said if international dairy prices and foreign exchange rates were to hold to current levels for most of the coming year, then it is possible that the 2010/11 payout could be well over $8.00. However, the forecast payout has been set at $6.90-7.10 reflecting a more cautious outlook given the high degree of volatility in the market.

“That’s what the market looks like right now, but we know that there is substantial volatility in the market. The reality is that we are seeing big swings in foreign currencies and turmoil in some economies. These factors could have a big impact on demand for dairy products and the prices we ultimately realise.

“With this in mind, we believe a payout forecast in the range of $6.90-$7.10 is appropriate.

“Accordingly, farmers doing their budgets for the coming season should base their planning around a payout broadly in line with this year.

“If prices hold up throughout next season, we could be looking at a significant improvement during the course of the year. But at this stage, in the current volatile environment, it would not be sensible to count on this.”

The Co-operative has also set the Fair Value Share (FVS) price for 2010/11 at $4.52 per share.
In November last year, shareholders voted to move to a Restricted Market Value Range – reflecting that Fonterra shares can only be held by supplying farmers.

The Independent Valuer, Grant Samuel, has determined a Restricted Market Value Range of $3.95-$4.58 per share with a mid-point of $4.27 per share. This represents an 11.5% increase on the Restricted Market Value Range mid-point of $3.83 estimated in December.

As Fonterra is transitioning to a Restricted Market Value approach, the share price is being effectively held at $4.52 per share until the Restricted Market Value mid-point reaches this level. During this transition period, the Independent Valuer is continuing to also provide a view of an unrestricted Fair Value Share price. The Valuer has determined a Fair Value Range for the 2010/11 season of $5.26-$6.11 per share, with a mid-point of $5.69 per share (up from an estimate of $5.10 in December 2009).

Sir Henry said the increase in the Restricted Market and Fair Value Ranges since the estimate in December was largely due to an increased value for Fonterra’s regional consumer businesses, which have been performing very strongly over the last several years, as well as the positive impact of retentions on the share price.

2010/11 Payout Forecast

Fonterra CEO Andrew Ferrier said the opening forecast Milk Price of $6.60 per kgMS was based on a favourable outlook for dairy pricing.

“There continues to be strong growth in dairy consumption and demand from China, the rest of Asia, the Middle East and North Africa.

“Meanwhile, global supply remains constrained, with production down because of adverse weather in Europe and Australia, while tight credit conditions are constraining dairy growth in the United States,” he said.

However, Mr Ferrier said there was considerable volatility in the market. Unfavourable movements in foreign exchange rates or economic conditions in major markets could have an adverse impact on global dairy demand and pricing.

Mr Ferrier said: “The forecast Distributable Profit range of 30-50 cents per share is an early indication that we believe there will be a rebound in operating profits in our FTO and Ingredients businesses. Current year operating profits are under pressure due to poor stream returns. In other words, the returns on cheese and casein are lagging the returns on whole milk powder. Under Fonterra’s new Milk Price, if non-powder returns lag the returns on powders, there is a reduction in profit. For next year, unless there are significant further increases in powder prices, it is expected that stream returns will improve from 2009-10.

“In addition, we expect another solid year of profit growth in our consumer businesses in 2011,” Mr Ferrier added.

Fair Value Share

The Independent Valuer, Grant Samuel, said the major driver of increases in the Restricted Market and Fair Value Ranges was a higher value of the consumer businesses, consistent with share price movements for large listed FMCG (fast moving consumer goods) companies.

Mr Ferrier said it was heartening to see that the continued strong performance of the consumer businesses had given the Valuer the confidence to increase their value.

Grant Samuel assessed the Restricted Market Value mid-point for 2010/11 to be $4.27 per share, up from the $3.83 per share estimated in December. This implies a discount of 25% on the Fair Value Share Range. “It’s pleasing to see that the Valuer now assesses the restricted value at $4.27 per share which is now only slightly below our approved price of $4.52 per share,” said Sir Henry. “It is encouraging to see this gap is closing.”

2009/10 Payout Forecast

Sir Henry said the Board had also reviewed the forecast for the current 2009/10 season.

“We remain on track to achieve a forecast payout before retentions of $6.50-$6.60,” said Sir Henry.

This payout combines a forecast Milk Price of $6.10 per kgMS and forecast Distributable Profit of 40-50 cents per share. The Distributable Profit forecast remains unchanged as a strong performance by the consumer businesses and a number of one-off gains have offset the negative impact of stream returns on non-powder products. Fonterra’s target dividend range is unchanged at 20-30 cents per share.

This means Fonterra farmer shareholders would on average receive a total payout after retentions of $6.30 to $6.40 for each share backed by milk production and a dividend of 20-30 cents for each dry share they hold.

Further detail on Fonterra shares is set out in Fonterra’s Investment Statement dated 1 April 2010 (on www.fonterra.com).

Click here to view the Valuer’s statement on Fonterra.com