Fonterra cut its forecast milk pay-out to NZ farmers yesterday and M2 Group (MTU.AX) shares continued to rally as shareholders voted in favour of its proposed merger.
Earnings to Take Centre Stage
Corporations in the US and Europe are now well into announcing quarterly profits, and as we have mentioned previously during these “earnings season” periods investor focus usually shifts from economic issues back to company profitability. Given the recent sell-off and negativity in markets, we believe a solid earnings season will be crucial in reviving investor confidence. On this front companies in Australia and NZ will start to report quarterly profits in February.
M2 Merger Finalised
M2 Group (MTU.AX) shares are up +32% since being added to the Australia portfolio on 1 September, strongly outperforming the broader market (as shown below). The outperformance has been driven by an announcement last year where Vocus Communications proposed a merger with MTU in which shareholders will receive 1.625 VOC shares for each MTU share (At current prices holders of MTU shares will receive $12.18 of shares in the new merged company for each share they own). We remained positive on the MTU investment thesis and indicated to our members that we were waiting for a final decision on the merger. Given a merger has now been voted upon, we will look to reallocate our holding in MTU into another investment
Fonterra Farmgate Milk Prices Lowered
Fonterra Co-operative Group reduced its forecast Farmgate Milk Price (price paid to farmers) for the 2015/16 season from $4.60 per kg of milk solids to $4.15 per kg of milk solids. The decrease has been driven by lower commodity prices, with dairy continuing to struggle with over supply factors. The chart illustrates the decline in Global Dairy since 2013. However, given milk solids is the single largest cost to FSF, over the long run this should be view as a positive for the company.
Fonterra (FSF) provides investors a wide ranging exposure to the dairy industry. FSF focuses on converting the milk it collects from farmers into higher margin products including ingredients, foodservices and consumer brands in Australia, Middle East and Asia, Greater China and Latin America. With a heavy concentration to emerging markets, FSF is well placed to capture the growing demand for protein from the emergence of the middle class in these countries. is a vocal supporter of the “Dining Boom” thematic and in our opinion it is set to be a multi-year investment theme, with Australasia set to directly benefit from this dynamic given their favourable trading arrangements and close proximity with China and the rest of Asia.
Since our last update in November, the share price has continued to rally modestly, up a further 6.9% in difficult market. Click Here to read our latest full report on Fonterra and the impact of the lower Farmgate Prices.
