Yovich & Co. Weekly Update - 29 July 2013

Jul 29, 2013 | Commentary

This Week's Themes

• The New Zealand market returned to the black after consolidating last week but found resistance at the 4,600 level. Sentiment was boosted by the below comments from The Reserve Bank Governor:

    o Expectations are that the Cash Rate will stay at 2.5% through 2013.

    o Graeme Wheeler says N.Z. dollar remains 'High'.

    o Removal of monetary stimulus will be needed in the future.

    o Growth in N.Z. economy picking up but high dollar remains a headwind.

• The Aussie market also had a strong week, extending a 5 week rebound as commodity prices improved. Total rebound is 6.22% over the 5 weeks.

• The Chinese market recovered some of the losses from last week but remains at relatively low levels, trading at the bottom of the range for the year as slowing growth continues to weigh on the markets.

• The NASDAQ lead U.S. markets higher as Apple reported better than expected earnings.

• European stocks where lower as companies missed market expectations for their reports.

• The NZD strengthened further on the hawkish tone from the RBNZ.

Investment News

Fonterra Share Fund (FSF.nz) – Trading Update

FSF has had a great run since listing in November last year, with international investors valuing growth potential more than the current cash flow and dividend that Fonterra produce. After reaching a high of $8.09 in May, the share price has fallen after the drought had an impact on the bottom line. In the trading update, Fonterra reported that they expect to deliver EBIT of around NZ$1 billion in the 2013 financial year, slightly down on the forecasted NZ$1.079 billion that they estimated in the prospectus. The impact of the drought on earnings was offset by a lower interest expense and thus the earnings per share was not impacted and the dividend retained at 32 cents per share.

With international interest in the New Zealand Dairy industry running hot, Fonterra is being valued compared to other international food producers such as the Irish Dairy Company, Glanbia which trades on a 15.7 times P/E multiple, 11.9 times EV/EBITDA multiple and 1.1% dividend yield. The global average for these pricing metrics of Food Producers are 16.5 times P/E, 10.9 times EV/EBITDA and a 1.8% dividend yield. Given these averages, First NZ Capital has an outperform recommendation for FSF and $8.30 price target, current price is $7.43.

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Jarrod Goodall

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