Fonterra shareholder fund units dropped by more than 1% today as it joined the NZX50 and a research firm says the units are overvalued.
The dairy giant's fund – the first chance for non-dairy investors to get a slice of the New Zealand industry – has surged above its $5.50 offer price since listing in late November.
The fund (NZX: FSF) displaced Cavalier Corporation on the NZX50 today but by mid-afternoon had dropped 8 cents to $7.26.
Before the bookbuild, Morningstar Research warned of uncertainties with investing in the Fonterra units and said fair value was $5.50.
A fresh report, released this morning, reiterated that line – despite the units appreciating more than 30% since trading began less than two months ago.
The Morningstar report says the majority of Fonterra's returns relies on commodity products such as milk powder, which generates mid-single digit operating margins and has "no pricing power".
Fonterra will struggle to lift returns in higher-margin branded goods, the note says, because of competition from established multinationals Nestle and Danone.
"We believe the company is overvalued compared to our intrinsic value of $5.50 per unit."
Fonterra – the world's biggest dairy exporter – faces increasing competition in New Zealand, with two Chinese dairy companies announcing investments of $420 million in recent months.