First NZ upgrades Fonterra recommendation to 'outperform', cites buying opportunity

Friday 2nd August 2013

First NZ Capital upgraded its recommendation for units in Fonterra Cooperative Group's shareholders fund to 'outperform' from 'neutral', saying a short-term pullback in the price is a buying opportunity.

At the same time, the brokerage lowered its earnings forecasts for Fonterra for the coming three years and reduced its 12-month target price on the units to $8.30 from $8.50 after the dairy company last week cut its forecast for 2013 earnings because of a drought in New Zealand and intense competition in Australia.

The drought-related factors that led Fonterra to pull back earnings forecasts are non-enduring events, First NZ said in a note.

"Our long-term view on Fonterra remains unaltered," the brokerage said. "The prize of successful execution of the company's cost initiatives in the next two years, coupled with its consumer brands strategy over the next three to five years is rewarding."

Fonterra is the largest global supplier of basic dairy commodities into the global milk pool and the cooperative could double its earnings before interest and tax from $1 billion to $2 billion over time by significantly expanding its existing consumer and business service brands through organic and value accretive acquisition growth in the global dairy market, as well as from better cost efficiency, First NZ said,

"We would use short-term pullback in Fonterra's stock price as a buying opportunity," the brokerage said.

Fonterra's units dropped 2.8 percent after the earnings downgrade on July 25. Today, the units slipped 0.4 percent to $7.15, crimping their gain this year to 2.1 percent.

BusinessDesk.co.nz

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