Fonterra Shareholders’ Fund

FSF Details

Resumption of Trading: Fonterra Shareholders' Fund (ASX: FSF) provides investment opportunity based on the performance of Forterra Co-operative Group. The company specialises in dairy products such as milk powders, dairy fats, cheese and proteins manufactured and services in New Zealand, Australia, Europe and Latin America and distributed in over 140 countries. The market capitalisation of the company as on 10 May 2021 stood at $434.30 million. As per a recent update, the securities were in a trading halt until the announcement on capital restructuring, and it has resumed trading on 7 May 2021. 

Business Update: On 6 May 2021, the company has declared that it is starting a consultation process with farmers regarding a change in its capital structure, with a view to provide more flexibility to the farmers and giving them more control. Thus, it is capping the size of the Fonterra Shareholders’ Fund and this will remain in place throughout the consultation process.

The management has proposed three options in regards to the capital restructuring process – first, is the buy-back of shares or units (for maintaining the Funds size thresholds); second, increase the fund size thresholds (allow fund size to grow), and third is to review other capital structures. The consultation process is likely to follow for several months, and the company is expecting to submit a proposal for voting by its shareholders at their annual meeting in November 2021. If the Board makes the decision to seek change to the co-operative’s capital structure, it would be aiming for the farmer vote around the time of the Annual Meeting in the month of November as well as the approval of 75 percent of the votes from the voting farmers would be needed.

The company is considering a change in its capital structure to prepare itself for a potential decline in milk supply due to factors such as climate change impacts, regulatory changes, and alternative land uses.

H1FY21 Performance Update: During the period, Fonterra Co-operative Group Limited reported a decrease in revenue by 5% (NZ$9,915 million in H1 FY2021 vs NZ$10,423 million in H1FY2020) due to delays in shipments. The company has reported an increased gross profit from operations to NZ$1,722 million in H1FY2021 vs NZ$1,668 million in H1FY2020. The company also announced an interim dividend of 5 cents per share.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: The company has reported forecasted farmgate Milk Price as NZ$7.30-NZ$7.90 per KgMS. The company gave guidance for full-year forecast normalised earnings per share to be between about 25cents- 35cents per share. 

Key Risks: The increase in dairy price will adversely impact Foodservice and Consumer margins. The liquidity risk can also delay the supply chain and other operating activities.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The stock of FSF is trading below its average 52-weeks' levels of $3.240 - $4.820. The stock of FSF gave a negative return of ~12.64% in the past one week and a negative return of ~11.42% in the past three months. On a technical analysis front, the stock of FSF has a support level of ~$3.697 and a resistance level of ~$4.049. We have valued the stock using a P/CF multiple-based illustrative relative valuation and have arrived at a correction of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer average P/CF (NTM trading multiple), considering the exposure of the company to the Chinese market, and the present disruption in the sector. For the purpose, we have taken peers such as Synlait Milk Limited (ASX: SM1), Beston Global Food Company Limited (ASX: BFC), Bega Cheese Limited (ASX: BGA), etc., which comes under dairy sector. Considering the aforesaid facts, expected decline in milk production, valuation and market volatility, we recommend a ‘Sell’ rating on the stock at the current market price of $3.800, down by 6.173% as on May 10, 2021.

FSF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Nutritional Growth Solutions Limited 

NGS Details

Approval of Trademark in China: Nutritional Growth Solutions Limited (ASX: NGS) produces and supplies clinically tested nutritional supplement formulae for children.  It is engaged into research into paediatric nutrition at Schneider Children's Medical Centre in Israel. The market capitalisation of the company as on 10 May 2021 stood at $18.46 million. As per a recent update, the company expanded its footprint in China and Europe and got the rights to the Healthy Daily Height trademark in China.

Q1FY21 Results Update: The Company reported increased revenue of US$810K in Q1FY2021 vs US$461K in Q1FY2020. The total net cash used in operating activities is US$1.1 million. The company announced the launch of the Healthy Height flagship store on Tmall Global.

Q1FY21 Cash Flow from Operations (Source: Company Reports)

Outlook: The Company's cash balance is US$3.402 million ended Q1 2021, which can be reinvested for future growth plans. NGS signed an agreement with leading child celebrity and social media influencer Gavin Thomas to promote the brand in China, which might lead to top-line growth.

Key Risks: The company is incorporated in Israel, and thus there may be culture differences in the way of conducting business in different international markets. Its global operations also expose it to foreign currency fluctuations.

Stock Recommendation: The company seems to be well-positioned to continue to roll out new strategies and products in new territories to drive market growth. The company is introducing a new range of products in the market which will significantly expand the market opportunity. There is an uptick in online sales during a pandemic, extrapolating the same in future as the company is increasing distribution channel in retail and e-commerce platform. The stock of NGS is trading below its average 52-weeks' levels of $0.175 - $0.380. The stock of NGS gave a negative return of ~7.31% in the past one week and a negative return of ~23.99% in the past one month. On a technical analysis front, the stock of NGS has a support level of ~$0.175 and a resistance level of ~$0.215. Considering the decent quarterly performance, comfortable cash position, approval of trademark in China and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.190, down by 2.565% as on May 10, 2021.

NGS Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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