Units in 'overvalued' Fonterra fund take a tumble
"But you don't own the global Fonterra business with these securities. You are better off buying the Fonterra debt. You still get yield and rank much higher up the security chain."Featured comment
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.