Australian research firm Morningstar is ending its coverage of Fonterra from January, citing a lack of business pricing power from the co-operative because of its reliance on milk powder earnings.
In a review of Fonterra's first-quarter trading, Morningstar said despite being the world's largest exporter of dairy products Fonterra derived two-thirds of its earnings from milk powder - a largely commoditised product.
''Consequently, the business lacks pricing power and, with strong competition from downstream peers such as large food and beverage multinationals Nestle and Danone, we do not forecast Fonterra to generate sustainable excess returns on invested capital.''
Fonterra's revenue could be volatile and affected by fluctuations in the farm-gate milk price and currency, Morningstar said.
The firm maintained its view Fonterra had no economic advantage and had high fair-value uncertainty. That was not expected to change in the medium to long term, it said.
Morningstar said it would end its coverage of Fonterra to focus on companies with more commercial advantages and lower uncertainty, which were more suitable for investors.
