An example of a successful investment

Value investing can still work. Here is my story behind the investment in Fonterra. 2025 might be a good year to look at investments with great assets.

I have been traveling which made writing articles slightly more difficult. Especially our goodbye tour through NZ in a Toyota Hiace was not ideal for writing. I have been looking at new investments though. Now in Bali, I wanted to give a sign of life. When I’m back in the Netherlands life will change again but I hope to keep posting at least once a month.

“The secret to successful investing is relatively simple: Figure out the value of something and then pay a lot less.” Joel Greenblatt

Value investing, like all investing, is simple but not easy. Recently, many value investors have been shifting away from this strategy to other, more growth-focused strategies. I’m afraid this will set them up for disappointment given how well growth strategies have worked recently.

In this article I will look back on my investment in Fonterra a classic value investment.

My thesis was relatively straightforward:

1. Milk is not going anywhere.

2. New Zealand is a great place to produce milk & Fonterra is a dominant player in NZ.

3. Fonterra is changing its focus from growth to return on capital

4. Fonterra is undervalued both on an asset and earnings basis.

What happened? Not much changed on 1 & 2. On 3 Fonterra is continuing its divestment plans. Actually, the plan is more aggressive than I expected. This helped the stock price but also just showcased the hidden value. So far it is only a plan. Will be interesting to see what valuation they can get. I liked the more direct sale of the Brazilian business more. Nothing is finalized which was slower than I expected. There is room for disappointment on this front given the higher expectations. on 4: good reported earnings delivered by Fonterra but somewhat underwhelming outlook.

So what did the share price do?

It increased 50%. In addition, shareholders got paid 55 cents NZD as a dividend for a 17% yield. Not bad.

What could have gone wrong

In my view, the good thing about this investment was the downside protection. Fonterra has a dominant position in the NZ milk business with a 78% market share. Given the advantages of NZ farmers Even in a bad year, Fonterra should be able to make a 5% return on assets. Given the discount on assets I was paying this would still deliver an 8% return. The balance sheet was strengthened already in previous years so that would not pose a risk.

The other major risk I saw was a stupid acquisition. This was luckily very unlikely given the strategy of divesting its non-core assets.

Current valuation

The company is now trading roughly at book value. This still is attractive for a geographically advantaged company. I still think the company should be able to stay at the 9-10% return on capital level. This still means good returns but nothing exceptional. There is clear potential upside from the sale of the brands but there is also quite some uncertainty on that level. I think the quality of the products is good but the branding is mediocre. The natural tension between normal shareholders and the controlling farmer shareholders that deliver milk is still there. Given the increase in the share price, the potential reward has diminished quite a bit. In addition, Fonterra is going to cut its Australian listing.

Given that I would need to open another broker to trade the NZ market and after researching all stocks there I’m pretty sure that is not worth the effort. So I decided to take the nice profits and reinvest them. Part of it went to initiate a position in:

It is the cheapest stock I know but has a lot more hair on it than Fonterra. Tianjin Development does have extreme upside potential, a healthy dividend, and a strong balance sheet.

Disclaimer: These are my ideas and not personal investment advice. I might own shares discussed and can sell those shares at all times. I don’t know your financial situation. Do your due diligence and do not blindly follow an article on the internet.