Fonterra opens organic milk supply to South Island dairy farmers
South Island dairy farmers will soon be able to supply organic milk to Fonterra.
Lloyd Downing, Morrinsville, claims that the co-op's share price could drop below $2/share.
"I have been warning Fonterra directors about this," he told Rural News.
"One of them said to me, 'oh farmers won't allow a takeover'... I replied, look at what happened to Westland Milk."
Hokitika-based Westland Milk was bought by China's Yili Group in 2019 after it ran into high debt and failed to deliver a competitive milk price to farmer shareholders.
Downing says some farmers, like him, are now questioning whether the new capital structure for Fonterra is working.
However, Jarden head of research Ari Dekker doesn't believe Fonterra will face a takeover bid anytime soon.
"The co-op will not be subject to a takeover offer," Dekker told Rural News. "The share price has been impacted recently by a 50% capital return."
Fonterra's share price has been having a rollercoaster ride in recent years. Five years ago, the co-op's share price was around $5.40/shar. Last week, it was sitting at $2.50/share.
Fonterra farmers need to buy shares before they can supply milk. Farmers who bought their shares at around $5-$6 each five years ago have seen their value halved.
In recent days, Fonterra shares have fluctuated by 20c. The share price rose when it announced a strong earnings guidance but lost the gains when the co-op announced another drop in its forecast milk price for the season.
The co-op also announced a $50 million share buyback scheme, which it hopes will prop up the share price.
Dekker isn't surprised by the share buyback, which will run for 12 months. He says $50m isn't a meaningful amount of capital for the co-operative and the balane sheet is in solid shape. "While value can be difficult to gauge, the gap between the Fonterra share price and the price units trade at does support the case to buy back Fonterra shares at these sorts of levels," he says.
Dekker points out that buybacks can be used when there is surplus capital "but Fonterra is probably also trying to signal that it views the shares as a bit undervalued".
Dekker says the earnings outlook is currently robust for Fonterra, in contrast with the trajectory on milk price. He says the strong earnings guidance should provide some value support for the shares.
