MONEY TALKS: Animal spirits alive and well in Fonterra float

By Paul McBeth

Nov. 30 (BusinessDesk) - I like a good piece of smelly cheese as much as the next well-heeled urbanite, but this initial flurry for Fonterra units has me stumped.

Investors climbed over each other's backs to get a few more units in the Fonterra Shareholders' Fund - a unit trust set up so regular townies like me can buy our way in to get some upside from the dairy exporters' earnings without ceding farmers' control of the cooperative.

The price spiked 26 percent at its height to $6.95 as people paid the fattest premium in recent memory to take a bigger chunk of the Fonterra story. That's a big expectation sitting on the shoulders of New Zealand's biggest company, because the more someone's willing to pay, the bigger the reward will have to be.

Last week I was pretty sceptical of the fund. I was swayed by research firm Morningstar's report saying the offer was overpriced and lacked certainty as to how Fonterra was going to break into high-value branded goods.

Today's price action hasn't shaken that feeling for me.

At $6.85, the latest price on my screen at the end of Friday, an investor is looking at a 4.7 percent return from next year's forecast dividend of 32 cents per share. That was how much it paid out this year, and was a small step up from 27 cents in 2010 when Fonterra tinkered with its structure to align dividends with the value-added component of its earnings.

Even at the cheapest price the units traded at, $6.56, you're only looking at a gross dividend yield of 4.9 percent.

Do you know where you get 4.9 percent returns? In a five-year term deposit with the bank.

You may sneer, saying that's not a fair comparison and you wouldn't be wrong.

After all, a unit trust that's essentially tied to the equity portion of a company should be offering something better than simply putting it in the bank.

Especially when the company has a history of relying on making the base product, leaving it more in the realm of a food ingredients manufacturer, rather than a high-value branded food producer.

That of course means if Fonterra's new boss can win over his farmer shareholders and bring them along with his vision of a high-value business, there's plenty of upside there.

Risk and reward, I think the phrase goes.

And with an increasingly dairy-hungry Asia driving global economic growth, Fonterra should be well-positioned to latch on to that upside, right?

That's the theory, but it would be naïve to think the likes of Nestle and Danone will give New Zealand's main dairy player a free run at what's set to become the world's power-broking region.

And that causes me to take a slightly more conservative view of Fonterra's aspirations.

I hate to say, but that puts me in the camp with Fonterra's farmers, at least in terms of TAF - otherwise known as Trading Among Farmers.

Also kicking off today - in fact it was the point of the whole float according to party line - was the stock exchange-run scheme enabling farmers to trade their Fonterra shares among themselves. Not a great start so far. Where unit trading outstripped a very heavy day of trading in NZX50 stocks, just 12 shares changed hands among Fonterra farmer-shareholder at $6.64 apiece. Let's put that in perspective - Fonterra Cooperative Group has 1.62 billion shares on issue. No way to describe that but a quiet start for actual trading among farmers.

Chairman elect John Wilson, who hasn't personally taken up units, says farmers will wait and see before making up their minds. A line of thought I'm more inclined to follow.

He says Fonterra plans to make "another couple of offers to farmers in the new year" of shares, though he's hazy on the details as the board hasn't made any decisions yet.

Fonterra's farmer-shareholders are in the box seat when it comes to deciding on the group's fortunes, so they can afford to be picky.

Of course Fonterra is testing the waters and seeing what its shareholders are comfortable with - that's only natural given they've shot down more comprehensive proposals in the past.

This float started life as more about soothing their fears about outside investors than offering an attractive investment opportunity. Today's results suggest there's irrational appetite for predictable returns from the food industry, especially when it's based in a politically stable, China-friendly country.



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