Fonterra's investment in Chinese company Beingmate has had a negative impact on its profit.

Fonterra, New Zealand's largest company, has posted a net $348 million loss for the six months to January 31, after writing down its investment in Chinese company Beingmate by $405m.

The result was on revenue of $9.8 billion, but the loss is 183 per cent below its last year's after-tax return.

At the same time the dairy giant has lifted its farmgate forecast price to $6.55 per kilogram of milksolids from $6.40, but with a revised forecast earnings per share range of 25-35c.

Wang Zhentai (Beingmate Chairman), Fonterra chef executive Theo Spierings, former Prime Minister John Key and Song Kungang (Chairman of China Dairy Industry Association) at the signing of a memorandum of understanding between Fonterra and Beingmate in 2016.

By contrast, rival minnow Synlait posted a record half year after-tax profit of $40.7m, compared with $10.6m for the same period last year.

READ MORE:

* Fonterra's profit falls, revenue rises and farmers' returns lift

* Fonterra partner Beingmate plans to sell off dairy farms as it forecasts big loss

Chairman John Wilson described the performance of Beingmate as "unacceptable". In 2015 Fonterra took an 18.8 per cent stake in the company, costing $750m at exchange rates at that time.

STUFF Waikato Federated Farmers president Andrew McGiven says Fonterra will have to watch its competition.

Since then Beingmate's share price has plummeted, amid a crisis of management and difficulties over new infant formula regulations.

"While we appreciate the substantial opportunity and privilege of our business in China, our shareholders and unitholders will be rightfully disappointed with this outcome. Beingmate's continued under-performance is unacceptable. The turnaround of the investment is a key priority for our senior management team," Wilson said.

"The opportunity in the Chinese infant formula market remains, as does the potential for our Beingmate partnership – but an immediate business transformation is needed for Beingmate to benefit from the ongoing changes in the market."

He said Fonterra's Greater China business continued to perform well overall but the Beingmate investment had been re-assessed so that it reflected a fair value.

Wilson said the board had now assessed the carrying value of Beingmate at $244m, an impairment of $405m.

According to LIC and DairyNZ New Zealand Dairy Statistics for the 2016-17 season, the 15c lift in milk price forecast means an extra $278m to the economy nationally,



For the average dairy farmer milking a 414-cow herd producing 381 kilograms of milk solids per cow, it will provide an extra $23,634 a year.

Analyst Mark Lister of Craigs Investment Partners said the result was largely as expected.

While there were some negatives such as Beingmate and the Danone court payout of $183m, operational results had picked up during the second quarter.

He said debt levels had now risen to 52 per cent, whereas Fonterra would prefer them to be between 40-45 per cent.

Federated Farmers dairy chairman Chris Lewis called the result a mixed bag.

The 15c lift in the milk price was a positive, reflecting global dairy prices over the past 6-12 months.

"It's been pretty level, steady as she goes and farmers like steady as she goes - especially after two to three years of poor returns. Having a payout in the mid-$6/kg MS is a great result."

Farmers would be disappointed in the forecast dividend range of 25-35c per share which was below expectations.

Beingmate was "a negative" and shareholders would be demanding greater accountability over the failing investment.

"As farmers we all know that being in business is a tough gig and when you make investments in the short term, there will be lows and highs but it's about the long term strategy and outcome."

He urged shareholders to attend the shareholder meetings and ask some hard questions of their directors.

The lift in milk price this late in the dairying season would also give farmers an indicator on what the final payout would be in May, he said.

"There's only a few months production left and they will be 90 per cent sure that their product will be sold, there will be no downside to that and if there is, they will look pretty stupid. Farmers can be pretty confident, being the end of March now, they can bank on that milk price being pretty solid," Lewis said.

Waikato Federated Farmers president Andrew McGiven said while the lift in payout was pleasing, he was concerned as a supplier-shareholder about the low dividend and he assumed that included retentions.

"As a co-operative, that's Fonterra's point of difference from the corporates in the milk price and with increased competition in the area, that's going to be an issue for them if they are only just getting over the line with the milk price."

The increase in competition in Waikato with Open Country Dairy expanding and Synlait looking at moving into North Waikato would also put added pressure on the co-operative to lift its performance, he said.

"I'm getting a lot of anecdotal evidence from Fonterra suppliers around the traps that they are not happy with Fonterra's performance and the way it's going. If they are talking that way they are probably looking at other options. The pressure will be on Fonterra to lift its game and inspire some confidence in their suppliers to keep them on."

When asked if the milk price lift was a carrot thrown to suppliers to offset any ill feeling towards the dividend he said: "It smells that way. The GDT over the past few months hasn't done anything spectacular so I'm wondering why that is and whether they are trying to cover the fact that they lost 10c in the dividend from the Danone court case and then another 2-4c from the Beingmate write-down.

"Why is that coming off the dividend, shouldn't that be coming off the balance sheet?"

McGiven questioned whether Fonterra was budgeting on a dividend from the Beingmate investment to prop up the share price.

Main other highlights:

• Interim dividend of 10c per share to be paid in April

• Total forecast cash payout $6.80 - $6.90

• Revenue $9.8b, up 6 per cent from the 2017 interim results

• Earnings before interest and tax $458m, down 25 per cent from the 2017 interim results

• Ingredients before tax earnings $558m, up 9 per cent from the 2017 interim results

• Consumer and Foodservice before tax earnings $193m, down 38 per cent from the 2017 interim results