Yovich & Co. Weekly Update - 3 December 2012
Dec 3, 2012 | Commentary
This Weeks Themes
- The New Zealand Market continued to march upward to mark another post GFC high with the market buoyed on Friday by the very successful floating of the Fonterra Share Fund.
- The U.S. markets remain on tender hooks as investors wait for the outcome of the budget negotiations. Tech stocks and utilities were the outperformers.
- Euro area finance ministers reached a €30 billion agreement on a new financing package for Greece giving investors confidence in the Eurozone.
- The NZD continues as it has done for the past few months to seesaw around the 82 cent USD mark.
Fonterra Shareholders Fund (FSF.nz) – Initial Public Offering:
The long awaited listing of Fonterra on the NZX went ahead on Friday with the strong oversubscription indicating that the share price would open above the IPO price of $5.50. However, I was very surprised when it opened at $6.66, trading as high as $6.95 before closing at $6.85. In hindsight I can see the market dynamics that have created such a high premium for the stock but believe that it will be a short term phenomenon. The buying pressure is coming from large hedge funds desperate to get exposure to a significant player in the soft commodities market, while on the other side of the market there are very few sellers with shares being tightly held by retail shareholders, who have not been informed of their shareholding yet and loyal “Friends of Fonterra” shareholders.
To contrast the current pricing metrics to other global food producers such as Kraft, Heinz, Danone and Nestle, they trade at an earnings multiple of around 12-16 times earnings. With Fonterra trading at $6.85, they are trading at 13.5 times current earnings, which puts them near the middle of the range, but when you consider that Fonterra is a primary producer and does not have the global brands of the comparable group, I would expect that they would be trading at a lower multiple. In addition, the fact that these shares do not carry voting rights and that Fonterra should act in the interest of farmers and not shareholders also indicates that the shares should trade at a discount to other comparable companies. From a dividend yield perspective, a dividend of 32 cents and a share price of $6.85 gives a gross yield of 4.67% and after tax is reduced to 3.36%. Prior to the listing the general thought was that a gross yield of 5.8% was fair.
I am a long term believer in Fonterra and there are exciting prospects for companies that produce soft commodities but I can not see any value at the current price. We will be receiving research coverage for Fonterra after the 10th of January and I will be waiting to see how the market goes between now and then and how it reacts to the analysts’ recommendation.
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