Fonterra (ASX:FSF) share price edges higher on half-year results

The Fonterra Shareholders' Fund (ASX: FSF) share price will be one to watch today as the Fund releases its half-yearly results.

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Fonterra Shareholders' Fund (ASX: FSF) shares are edging higher in morning trade after the organisation released its results for the six-months ending 31 January 2021. At the time of writing, the Fonterra share price has inched 0.22% higher to $4.66. In comparison, the S&P/ASX 200 Index (ASX: XJO) is currently trading 0.3% lower. 

Let's take a look at how Fonterra has been performing.

What's driving the Fonterra share price?

The Fonterra share price is on the rise despite the fund reporting a 5% decline in total revenue on the prior corresponding period (pcp) to NZ$9.9 billion. Gross profit, however, improved by 3% to total NZ$1.7 billion.

While reported net profit was down 22% on the pcp (NZ$391 million), normalised net profit came in at NZ$418 million, representing a 43% jump on the pcp. Similarly, earnings before income tax (EBIT), were down 18% on the reported numbers (NZ$657 million) but up 17% on the normalised numbers (NZ$684 million).

The normalised numbers reflect the underlying performance of the business. It does not take into account costs associated with the fund's divestment from Chinese dairy farms, which is still pending.

Breaking down EBIT by export region, we can see what helped to salvage Fonterra's results in the period and where its growth opportunities exist.

Normalised EBIT from Africa, the Middle East, Europe, North Asia, and the Americas was down 7% on the pcp. It totalled NZ$201 million. Asia Pacific (excluding China) normalised EBIT was up 9% to equal NZ$190 million. Normalised EBIT from Greater China was up an eye-watering 38% to total NZ$339 million. Over the period, 50.4% of all Fonterra's earnings came out of China alone.

Fonterra still forecasts the farmgate milk price to be NZ$7.30 to $7.90 per kilogram of milk solids (kgMS). Fonterra updated the market on this earlier in the month.

Earnings per share (EPS) for the fund are forecast to be between 25 and 35 cents. Fonterra will pay an interim dividend of 5 cents per share.

Words from the CEO

Fonterra CEO, Miles Hurrell, commented on the results, saying: 

While down on this time last year at a headline level, the 2020 financial year benefited significantly from the divestments of DFE Pharma and foodspring®.

Despite the major impact COVID-19 is having around the world, the Co-op is staying focused on what it can control – looking after our people, making progress on our strategy to drive sustainable value for New Zealand milk and remaining committed to our 2021 priorities. Those priorities are:

  • Our Co-operative, which is about being there for farmers and employees;
  • Performance, which is about hitting our financial targets; and
  • Community, which is about exceeding customer expectations, supporting communities through our nutrition programmes and making New Zealand's low carbon farming model a powerful point of differentiation.

Mr Hurrell also said inventory was up on the pcp. He attributes this mostly to shipping delays resulting from the pandemic.

Fonterra background

Fonterra is the largest company in New Zealand (by turnover and market capitalisation) and one of the largest dairy producers in the world. In fact, 30% of all global dairy exports are produced by Fonterra. Around 11,000 New Zealand dairy farmers own Fonterra as a co-op.

It was created out of the deregulation of the New Zealand dairy industry. As it has near-monopoly status, it sets the price it will pay dairy farmers for its products. This is the farmgate price. The price is calculated using global dairy commodity prices. This is because Fonterra exports 95% of all its product.

Fonterra share price snapshot

Unlike other dairy producers, such as the A2 Milk Company Ltd (ASX: A2M) and Synlait Milk Ltd (ASX: SM1), the Fonterra share price is up on this time last year.

One year ago, the Fonterra share price was trading at $3.78 and soon after hit a 52-week low of $3.24. Investors having bought Fonterra shares this time last year would be sitting on a tidy 23.28% return on investment.

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