John Shewan goes out to bat for Fonterra’s disappointed unit-holders

It’s  been  a  rough year  for  unit-holders in Fonterra  Shareholders Fund, with the unit price  slumping   from  $5.12   to   its  lowest point ever at  $3.15.  Chairman  John  Shewan  didn’t mince  words  when he told the Fund’s annual  meeting  this week  Fonterra’s  financial performance   had been  “very poor”   in 2019.

Not only had the unit price fallen markedly  but no distribution had been paid, he said.

This is disappointing and frustrating…Fonterra’s decision to not pay a dividend, and therefore a distribution to unit holders, as well as significantly impairing a small number of significant assets, no doubt came as a surprise to many of you. I understand and share the frustration that you rightfully feel, and the impact that Fonterra’s decisions have had on the unit price”.

Institutions and  private  wealth funds have  fled the  stock, the former declining from 25% to 15% and private wealth falling from 14% to 7%.

It  seems  there  may have been some  vigorous  exchanges   during the year  with  Fonterra’s board.  Shewan  signalled  this  when  he  said  that although the  FSF  directors  had  no decision-making role in relation to Fonterra’s governance or operations,

“ … we do consider it appropriate to represent the interests and views of unit holders to Fonterra and we do that.We have had several meetings over the last year with Fonterra management and in some cases Fonterra board members.”

But now Shewan  reckons  that  things are looking up — even  though the  turnaround will take time, Fonterra  is  making  “good progress”.

And the unit  price  has  moved up   33%   to  $4.18.

This does not excuse the significant decrease in the unit price over the past couple of years.”

But Shewan is impressed  by  the financial discipline Fonterra  is applying, with significantly lower operating and capital expenditure, reduced debt and improved cash flow.  Fonterra has based its 3-year and 5-year plan around getting the basics right.  This included the decision not to pay staff bonuses for the 2019 financial year.

But he warns  while there is improved  market  sentiment,

“ … Fonterra now needs to meet, and continue to meet, key milestones to regain confidence in it as an investment proposition. It has been pleasing to see Fonterra execute well on its asset sales – allowing for good progress to be made on deleveraging. Furthermore, it has increased disclosures, such as the quarterly earnings breakdown and its 3-year and 5-year plan.  In addition to the increased disclosures, Fonterra has provided the new strategy direction. This progress has aided in the improved market sentiment – especially the move to drop its volume ambitions and focus on value”.

Shewan   feels obliged   to  sound a  warning    to  Fonterra’s   bosses:

Notwithstanding the improved market sentiment, I believe it beneficial to see more detail on the strategy. There are still many questions on what the business will look like in the future and receiving greater detail on the strategy in FY20 will be instrumental in helping unit holders and farmers looking for more accountability, and more clarity on where Fonterra’s equity valuation might settle.”


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