Bold plans: Fonterra considering IPO of Australian business

Author
Andrea Fox, NZ Herald,
Publish Date
Thu, 23 Sep 2021, 10:14AM
(Photo / File)
(Photo / File)

Bold plans: Fonterra considering IPO of Australian business

Author
Andrea Fox, NZ Herald,
Publish Date
Thu, 23 Sep 2021, 10:14AM

In a historic disclosure milestone, New Zealand's biggest business Fonterra has laid out its financial achievement targets by 2030, including a 40-50 per cent improvement in operating profit, a $1 billion spend on moving to higher-value products and a $1b return to farmers from asset sales. 

It is also considering an initial public offer (IPO) for its Australian business. Fonterra would retain a stake. 

The intention is to return about $1b to shareholders by FY24, through planned divestments and improved earnings. 

Hurrell said Australia remained an important export market for New Zealand milk, especially for foodservice products and advanced ingredients. 

"We are considering the most appropriate ownership structure for this business, one option is an IPO, with the intention that we retain a significant stake," he said. 

"We see both these moves as critical to enabling greater focus on our New Zealand milk and, importantly, allowing us to free up capital, much of which is intended to be returned to shareholders." 

The farmer-owned cooperative said it would look to release capital from the sale of its Chilean business and review ownership options for Fonterra Australia. The performance of both areas have disappointed in recent years. 

The dairy exporting heavyweight said it was targeting a dividend of 40-45c per share, up from 20c a share in the 2021 financial year. The dividend was projected to rise to 30c per share by FY27. 

Capital investment would be increased from $600m in FY21 to $800m in FY22-24, rising to $980m by 2030 b 1b in FY28-30 as it pursues a strategy of differentiating New Zealand milk, growing its foodservice and active living activities and further strengthening consumer businesses. 

Another $1b was planned to be invested in sustainability measures by 2030. 

The company is targeting an average milk price to farmers of $6.50-$7.50/kilogram of milksolids for the next nine years. 

As already signalled in its 2019 strategy reset, the company aimed to be a leader in dairy innovation and science, and aimed to invest 50 per cent more in R&D by 2030. 

Products would increasingly emphasise the provenance of New Zealand milk and high standards of cow care. 

While Fonterra reset its business strategy two years ago after disastrous 2018 and 2019 financial results, details have been thin up until now. 

The strategy announcement will be important to Fonterra's 10,000 farmer-owners who made it clear in recent capital restructure discussions with the company that they wanted to see financial forecasts before being called on to vote at the end of this year. 

Chief executive Miles Hurrell said the strategy included refining Fonterra's asset portfolio to focus on New Zealand milk. 

The new focus is part of the cooperative's earlier business strategy reset, which shifted its focus from overseas milk pools and investments. 

"Fonterra believes it has an opportunity to differentiate New Zealand milk further on the world stage, with the aim of getting more value from the co-op's milk," Hurrell said. 

This required Fonterra to focus its capital and people on enhancing New Zealand milk and for these reasons the company had reviewed the ownership of its two remaining milk pools – in Australia and Chile. 

"Soprole is a leading Chilean dairy brand, and Prolesur is a subsidiary of Soprole focused on sourcing milk and manufacturing products in Southern Chile. The operations do not require any New Zealand-sourced milk or expertise, and in this context, we are starting the process to divest our integrated investment in Chile. 

"Fonterra Australia is on strategy for the co-op and remains an important export market for our New Zealand milk, especially for Foodservice products and advanced ingredients. We are considering the most appropriate ownership structure for this business, one option is an IPO, with the intention that we retain a significant stake. 

"We see both these moves as critical to enabling greater focus on our New Zealand milk and, importantly, allowing us to free up capital, much of which is intended to be returned to shareholders. 

"Our focus on New Zealand milk, sustainability, and innovation and science will see us shift every aspect of our business to create more value. In doing so we aim to continue to improve our financial performance and, as a result, strengthen our ability to repeatedly generate cash and create value for our shareholders and New Zealand." 

Four key-value targets were in Fonterra's sights by FY2030, Hurrell said. 

They are: 

- an average farmgate milk price range for the decade of $6.50-$7.50/kg milksolids. 
- a 40-50 per cent increase in operating profit from FY21. With the reduced interest from having less debt, this should translate into an approximately 75 per cent increase in earnings, enabling the company to steadily increase dividends to around 40-45 cents per share by FY30 
- a group return on capital of 9-10 per cent, up from 6.6 per cent in FY21 
- through planned divestments and improved earnings, an intended return of about $1b to shareholders by FY24, and around $2b of additional capital available for a mix of investment in further growth and return to shareholders. This in addition to the approximately $2b expected to be invested in sustainability and moving milk into higher-value products.