WELLINGTON/BENGALURU (Reuters) - New Zealand's Fonterra, the world's biggest dairy exporter, on Friday said there were no new operational developments that could have triggered a drop in its shares to record lows this week, but that its "performance is not where it needs to be".
The comments come as the dairy producer deals with drought conditions which have crimped output. It cut its annual earnings forecast in May and said it was reviewing two Chinese farm hubs and exploring a stake sale at its Brazilian joint venture.
Those moves are part of a full review announced last year to sell assets, cut debt and improve overall operations. Even so, the group's stock has nearly halved in value since the start of 2018, and its market value has lost about $1.3 billion in 2019.
(Graphic: Fonterra shares nearly halve in value since start of 2018, https://tmsnrt.rs/2FUFjRM)
On Thursday, share prices of Fonterra Co-Operative Group Ltd <FCG.NZ> and Fonterra Shareholders' Fund <FSF.NZ> closed at record lows having fallen 6.4% and 5.3% respectively. The shares typically tends to trade in narrow ranges.
"While the share price does not impact the Co-op's balance sheet or our ability to operate and pay our bills, it does impact our farmers' balance sheets," Chief Financial Officer Marc Rivers said in a stock exchange filing on Friday, issued in response to Thursday's stock drop.
Rivers said nothing has happened in its underlying business operations that could have caused the share price declines.
"But, our performance is not where it needs to be. We're doing everything we can to turn that performance around and are undergoing a full strategy review. We know there are going to be some bumps along the way," Rivers said in the filing.
Shares of both the group and the fund were up around 6% after Rivers' comments.
Still, the group stock is down about 25% this year as of Thursday's close, after sinking 27% in 2018.
"Investors seem to have no confidence in Fonterra's ability to deliver high dividends, and no confidence in its ability to grow," said Brian Gaynor, director at Milford Asset Management.
The stock drop may not directly affect the balance sheet but it has a psychological effect, and financiers will be looking at the company more carefully, said Gaynor, who also cited a recent decline in global dairy prices as a contributing factor.
"So if the company thinks it had no impact, then that's just naive," he said, reacting to Fonterra's statement.
The share slump coincided with shareholders of peer Westland Milk Products voting to sell the distressed dairy cooperative to Chinese dairy producer Inner Mongolia Yili Industrial Group Co Ltd <600887.SS>.
The move was a sign of shrinking confidence in the farmer-cooperative model also used by Fonterra, industry experts said.
Fonterra's financial year ends on July 31 and is widely expected to report annual earnings results in September.
(Praveen Menon in Wellington and Nikhil Nainan in Bengaluru; Additional reporting by Aby Jose Koilparambil; Editing by Christopher Cushing)
