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.”