Perpetual, Fonterra?s largest unitholder, happy to ride out short-term pain for longer-term gains

Fonterra Cooperative Group’s largest unitholder is prepared to ride out some short-term pain in the expectation the world’s largest dairy exporter will produce better returns a few years down the track.

Auckland-based Fonterra yesterday cut its dividend forecast to 10 cents a share from 32 cents while keeping the milk price at $8.30 a kilogram of milk solids, even though its calculations showed the price should rise to $9 per kgMS. Fonterra pulled back its expected returns as the higher price it is paying for milk isn’t matched by a similarly higher price for its manufactured products such as cheese.

Units in the fund dropped as low as $5.49 following Fonterra’s announcement yesterday, below last year’s $5.50 issue price, though they have since recovered some ground to be down 0.9 percent today at $5.70.

“We are aware that it is an agricultural business and we are prepared to weather short term volatility if we think that the longer term strategy remains in check and protecting the balance sheet is a very positive development even though it means that in the short term we will get lower dividends,” said Nathan Parkin, who holds 14.3 percent of the Fonterra Shareholders’ Fund among the A$20 billion of Australian equities he helps manage for Perpetual.

“If the company achieves what we think it can in terms of improving the returns within the business then the valuation starts to look pretty attractive in two to three years’ time.”

Perpetual bought into the fund at the issue price and continued to build its stake at lower levels, Parkin said. It stopped buying as the rally continued. The units touched a high of $8.09 in May.

Perpetual is betting Fonterra can reduce costs and run the company more efficiently whilst building successful brands for future growth, Parkin said.

“All these things serve to increase the return on invested capital that this business can generate over time,” he said.

Perpetual didn’t think Fonterra was favouring farmers over unitholders by retaining its forecast for a record milk payout, he said.

“They have shown that they are looking after a broad level of interests across the business,” Parkin said. ” I don’t think there is any particular tension between unitholders and farmers because the stronger the core business is, the happier we are and the happier I would have thought people who are selling into that business should be as well.”


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