Mark Lister, 12 August 2019

The bad news keeps on coming for Fonterra shareholders, with news this week confirming the full year dividend will indeed be zero, and there will be significant write-downs across a number of business units.

The company expects to earn 10-15 cents per share in the 12 months ending 31 July 2019, although given the need to reduce debt levels, no dividend will be paid. While this is not unexpected, it will still disappoint shareholders who have watched the dividend fall from 40 cents in 2016 and 2017, to 10 cents last year, and now to zero.

Fonterra's woes have been reflected in a very poor share price performance, especially given the backdrop of such a buoyant sharemarket. The price has slumped to an all-time low of $3.64, more than 40 per cent down from where it was trading at the beginning of 2018 and almost a third below the IPO price of $5.50 back in 2012.

In contrast, the NZX 50 has performed very strongly during this period. It is up almost 30% since the beginning of last year, and has gained more than 160 per cent since the end of 2012.

In terms of the write-downs, Fonterra noted that it needs to reduce the carrying value of several assets, and that these will total approximately $820-860 million. When this is offset against the company's 2019 net profit, it will mean a reported loss of some $590-675 million this year.

The assets in question are operations in Brazil and Venezuela, Fonterra's China farms, as well as the New Zealand consumer business and the Australian ingredients business.

While one could argue these write-downs only represent non-cash accounting adjustments, they still reflect poor capital allocation in recent years. This means a number of assets are no longer worth the amount of shareholder funds that have been applied to them.

Fonterra will report its annual result in mid-September, and investors will get more detail of the situation at that time. The focus will likely shift to the outlook and the 2020 financial year, with the market keen to assess the ability of the company to meet expectations.

With a strong rebound forecast from this year expected, it’s fair to say some analysts will be a little cynical about whether this is achievable.

Fonterra needs to make a number of changes to get its business back on track. In addition to poor allocation of capital, the cost base remains too high and the company need to find a way of reducing operating expenses in a sustainable manner, as well as cutting debt.

Fonterra is a very important business for New Zealand, and we all want to see it succeed. However, it is a big ship to turn around and given the wide range of issues that have become more obvious in recent years, long suffering shareholders might have to experience a bit more pain before they see results.