NZX50 slips as Fonterra result shines in the gloom

A stronger-than-expected annual result from Fonterra enlivened an otherwise flat day’s trading on the sharemarket.

Thursday, September 21st 2023, 6:56PM

by BusinessDesk

The S&P/NZX50 Index slipped 13.64 points, or down 0.12%, at 11,318.74.

There were 47 gains and 74 falls, with turnover very light at about $70 million.

Fonterra said its annual net profit shot up by 170% to a record $1.6 billion, driven by strong margins in its cheese and protein businesses.

Excluding a net gain from divestments of $248m, the co-op’s normalised profit after tax was $1.329b, up $738m compared with the same time last year, and well ahead of market expectations of $1.2b.

The news drove Fonterra’s units up by 17 cents to $3.46.

“The result was better than expected,” Salt Funds managing director Matt Goodson said.

“There are two things going on there.

“Margins in their various consumer products businesses are going well, but at the same time the price of milk inputs has fallen quite sharply.

“The latter part is hard for many farmers, but there is an offset with Fonterra’s (40c) final dividend,” he said.

“Their profits are very dependent on the gap between what they have to pay for the milk and what they can turn it into and sell.

“It often tends to be the reverse to how the industry is going,” he said.

Fonterra now boasts a strong balance sheet after sailing close to wind in recent years.

The co-op, which has divested its Chilean business Soprole and dairy farm investments in China, now boasts a much stronger balance sheet.

“They have done some pretty difficult-to-understand investments in days gone past, and they have cleaned up a fair bit of that,” Goodson said.

GDP news

News of a 0.9% rise in GDP over the June quarter did not cause a ripple in the market but it likely adds to the argument for still higher official interest rates, which could work against stocks.

As it happened, the two-year swap rate ended the day six basis points higher at 5.73% and some economists say the Reserve Bank’s next move will be upward.

Among the lower cap stocks, NZ King Salmon rallied by 3 cents or 15.8% to 22c after reporting a surprising earnings turnaround for the half year - a $10.6m profit compared with a loss of $24.5m in the previous corresponding period.

“NZ King Salmon seem to be slowly climbing out of the abyss with an upgrade,” Goodson said.

“They are doing the hard yards and are running their business a bit better,” he said, adding that a low NZ dollar was probably helping the business.

Retail company KMD Brands rallied by 4c to 82c after reporting an annual net profit of $36.6m and a 3c dividend on Wednesday.

“It’s fair to say that the market has uncertainty about KMD,” Goodson said.

“But it’s clawed back what it lost, post-result.”

Goodson said there was concern about weakness showing up in KMD’s last quarter and there was a wide range of views as to where things go from here.

“It depends on whether you believe in management’s goal to reach a 15% ebitda margin in the future.

“We think it will be a hard ask, especially since the weak Kiwi dollar will be a bit of a headwind for them overall,” he said.

As an importer, KMD faces higher costs in times of currency weakness.

Among the stocks to lose ground, Vulcan Steel dropped by 11c to $8.30.

The stock had been firm in anticipation of Vulcan joining the S&P/300 Index - which happened last Friday - but was now adjusting back after the excitement, Goodson said.

Tags: Market Close