Fonterra Shareholders' Fund (NS) Analysis

Overview

The Fonterra Shareholders' Fund (FSF) is a registered managed investment scheme under the Financial Markets Conduct Act 2013. The FSF provides investors an opportunity to invest in the performance of Fonterra Co-operative Group Limited (Fonterra). Outside investors who are not allowed to hold shares in Fonterra can invest in units in the FSF which gives them access to economic rights (such as distributions and capital movements), similar to those of a share. The Manager of the FSF is FSF Management Company Limited.

Fonterra is a dairy co-operative, owned and supplied by nearly 9,000 farming families in Aotearoa, New Zealand. Through the spirit of co-operation and a can-do attitude, Fonterra’s farmers, along with 20,000 employees around the world, share the goodness of our milk through innovative consumer, foodservice and ingredient brands. Sustainability is at the heart of everything we do, and we’re committed to leaving things in a better way than we found them. Everyday people working hard to be Good Together in the community.

The FSF has been granted Listing with a 'Non-Standard' ("NS") designation. This designation was granted because of the unique governance arrangements and unit holder restrictions. For further information, please see a copy of the waiver under Documents on FSF's homepage on nzx.com.

Performance

The following information was extracted from Fonterra Shareholders' Fund's annual report, released 25 September 2024:

Business performance for the 2024 financial year

Fonterra’s profit after tax from continuing operations was $1.17 billion and is equivalent to 70 cents per unit. Including discontinued operations, Total Group profit after tax was $1.13 billion and is equivalent to 67 cents per unit, down from 95 cents in the prior period. The main drivers of the difference between the periods are the very favourable price relativities in the Ingredients channel and the gain on sale of Soprole in FY23.

It is pleasing to see Fonterra leveraging its scale and diversification of channels and markets. This is evident in the significantly different composition of earnings between channels, with improved earnings in its Foodservice and Consumer channels partially offsetting lower margins in the Ingredients channel.

FY23 benefited from significantly favourable price relativities which eased over FY24, and this is the primary reason for the Ingredients channel operating profit decreasing $657 million to $898 million in FY24. This was partially offset by Fonterra allocating milk away from the Ingredients channel and into the Foodservice and Consumer channels. Foodservice and Consumer operating profit increased $138 million and $324 million to $463 million and $199 million, respectively, due to the increased sales volume and improved gross margins. Consumer operating profit included impairments of $244 million and $31 million in FY23 and FY24, respectively. Adjusting for impairments, the underlying operating profit improvement year on year was $111 million.

After adjusting for impairments, operating expenses for Fonterra’s continuing operations have increased 4% to $2.34 billion. This is largely reflective of Fonterra’s investment in its IT & Digital transformation that is expensed, rather than capitalised. The IT & Digital transformation and associated spend is expected to continue over the coming years.

Fonterra’s net debt at year-end was $2.6 billion, $0.6 billion lower than the prior year due to strong underlying earnings and improved working capital, including the lower volume of year-end inventory. The lower net debt coupled with higher equity, due to strong earnings, has resulted in Fonterra’s Debt to EBITDA reducing to 1.2x, well below the 5-year trend.

Similarly, Fonterra’s return on capital for the year was 11.3% which was significantly ahead of its FY24 target range of 8-9% and the 5-year average.