Dairy Equity announcement - 7 July 2008
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Dairy Equity Limited (DEL) | 9:29 am, Monday 7 July 2008 | DEL | 0.230 |
 -0.010 |
(-4.17%) |
Media Release 7 July 2008
Fonterra Retained Earnings Could Cost Shareholders
In a market update today, NZSX listed Dairy Equity Limited (DEL) warned its
shareholders that it may not receive any further Value Added Component (VAC)
payments from Fonterra for the season ended 31 May 2008.
Dairy Equity Chairman, Peter Jensen, said that Fonterra has already signaled
that it is considering retaining $0.30/kg milk solids from the payout for the
season just ended, and DEL understands that any retention will come from VAC
earnings and not the Milk Price.
"Fonterra is currently forecasting VAC returns from last season of $0.35/kg
milk solids, so it is looking at retaining 86% of its forecast earnings.
Given that Fonterra has already paid out around $0.05/kg milk solids, a
retention of $0.30/kg milk solids would mean that, unless Fonterra's actual
VAC earnings are higher than they are currently forecasting, there will be no
further VAC payments to come.
"A 30 cent/kg milk solids retention will cost DEL $880,000 (about two cents
per DEL share) in lost income this financial year after allowing for drought
related production shortfalls. In the normal course of events this loss of
income should be offset by a corresponding increase in the value of the Fair
Value Shares that we beneficially own.
"However, because Fonterra has set the new season share price before it has
made a public decision on retaining earnings from last season, it will be
June 2009 before it is able to reflect the value of any retentions in an
increase in the Fair Value Share price. In the meantime, this unrecognised
value will sit in limbo. We think this should be of concern to all Fonterra
suppliers because it means this season's Fair Value Share price will be
fundamentally wrong (too low) resulting in an inequitable transfer of wealth
between shareholders.
"If Fonterra does retain 30 cents of last season's VAC payment, farmers who
are currently in the process of redeeming shares permanently will get around
30 cents/share less than they should and those who are temporarily
over-shared as a consequence of last season's drought are being paid around
30 cents too much to adjust their holdings."
Peter Jensen said that if Fonterra retains 30 cents/kg of last seasons VAC
earnings, on a production adjusted basis DEL will permanently lose about
$255,000 on the sale/redemption of the beneficial interest in approximately
895,000 Fair Value Shares it sold on an ex VAC payment basis. Similarly, if
DEL sells the balance of its Fonterra investment (approximately 2.25 million
shares) before June 2009 at the current Fair Value Share Price, it stands to
lose around a further $625,000. DEL has raised this issue with Fonterra for
clarification and is still awaiting a response.
Ends.....
For Further Information
Peter Jensen
Chairman, Dairy Equity Limited (0274) 972 551
