Fonterra Co-operative Group’s profit downgrade doesn’t impact its rating but increases the importance of its asset sales, Fitch Ratings says.
Fonterra yesterday cited «heightened risks» in the fourth quarter to the co-op’s previous forecast normalised earnings and lowered its guidance to 10-15 cents per share from 15-25 cents. That implies a forecast range of $161.2-241.8 million, compared to $241.8-403 million.
Fitch – which had already revised its outlook to negative from stable when Fonterra cut its earnings forecast in February – said the latest downgrade will not immediately affect the rating.
But it says asset sales to reduce Fonterra’s leverage over the next one to two years «have greater significance after the dairy co-operative announced a profit downgrade.»
Fonterra yesterday said it was commencing a strategic review of its two wholly-owned farm-hubs in China and is reviewing options for the future ownership of its Dairy Partners Americas (DPA) Brazil joint venture, including a potential sale of respective stakes. It is also closing the Dennington factory in Australia.
The world’s biggest dairy exporter is strengthening its balance sheet as part of its wider strategic review. That’s included the divestment of a range of assets no longer deemed central to the cooperative’s future, the most recent being the $380 million sale of the Tip Top ice-cream business.
Fitch said the lower profitability will add to pressure on the firm’s ability to reduce its leverage but «we believe Fonterra’s ongoing strategic review will take time and that challenges will arise throughout the process, and this has been incorporated in our negative outlook.»
It said the latest actions «add to the raft of initiatives that Fonterra has announced to the market as part of its strategic review and continues to highlight the commitment the co-operative has to ensuring its investments and major assets support the group strategy.»
Units in the Fonterra Shareholders’ Fund and Fonterra’s farmer-owned shares last traded at $4.22. Both are down 21 percent over the past 12 months.