Units in 'overvalued' Fonterra fund take a tumble

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.

dwilliams@nbr.co.nz

This article is tagged with the following keywords. Find out more about My Tags

NZ Market Snapshot

Forex

Sym Price Change
USD 0.7977 0.0012 0.15%
AUD 0.9075 -0.0005 -0.06%
EUR 0.6268 0.0003 0.05%
GBP 0.4948 0.0005 0.10%
HKD 6.1875 0.0094 0.15%
JPY 85.2720 0.0330 0.04%

Commods

Commodity Price Change Time
Gold Index 1248.5 4.340 2014-10-21T00:
Oil Brent 86.2 0.820 2014-10-21T00:
Oil Nymex 82.5 -0.260 2014-10-21T00:
Silver Index 17.5 0.190 2014-10-21T00:

Indices

Symbol Open High Last %
NZX 50 5233.1 5284.3 5233.1 0.89%
NASDAQ 4359.2 4419.5 4316.1 2.40%
DAX 8693.1 8889.8 8717.8 1.94%
DJI 16406.0 16620.8 16399.7 1.31%
FTSE 6267.1 6372.3 6267.1 1.68%
HKSE 23300.5 23398.0 23088.6 1.31%
NI225 15038.2 15129.1 14804.3 1.75%