New Zealand shares dropped after Fonterra Cooperative Group cut its dividend forecast, weighing on the Fonterra Shareholders' Fund and A2 Milk Co. Steel & Tube Holdings plunged to a 17-year low after warning of a full-year loss.
The S&P/NZX 50 Index fell 60.09 points, or 0.7 percent, to 8,553.23. Within the index, 20 stocks fell, 19 rose and 11 were unchanged. Turnover was $171 million.
Fonterra Shareholders' Fund units led the index lower, dropping 6.8 percent to $5.35. The cooperative has raised its forecast farmgate milk price for the 2018 and 2019 seasons while cutting its projected dividends for 2018, saying rising global dairy prices are squeezing margins.
It raised its forecast milk price for the current season by 20 cents to $6.75 per kilogram of milk solids and gave an opening price forecast for 2019 of $7/kgMS, but cut its forecast dividend range for the current year to a range of 15-20 cents a share, from a previous forecast of 25-35 cents.
"People were aware that there was a high chance the dividend would be reduced. It's the magnitude that has frightened people," said Rickey Ward NZ equity manager at JBWere New Zealand. "It's very easy for many potential investors to find a reason not to invest, normally that comes around the governance structure and the thought that they favour farmers over investors."
"Fonterra has talked a lot of good stories, and they're struggling to deliver - it has been a very tough year for them, they've had to settle with Danone and had a poor experience with Beingmate, all in an environment where the GlobalDairyTrade auction price has increased rapidly in the second half," he said.
A2 Milk dropped 4.4 percent to $10.24. The stock has fallen 22 percent since last week, when it reported a 70 percent increase in revenue for the nine months to March 31.
"A2 disappointed because the market had very high expectations," Ward said. "Though they're growing at 70 percent, with any company that has a track record of underpromising and overdelivering people start to price in over-delivering, and when they don't do that, naturally you're starting to get an unwind."
"It has to earn back that justification to be rewarded for earnings yet to be obtained. You've got MSCI buying and the share price weakening, so it can only be people reflecting on a growth company that hasn't delivered the growth they expected," Ward said.
Auckland International Airport fell 2.4 percent to $6.59 and Comvita dropped 2.3 percent to $5.93.
Argosy Property was the best performer, up 2.5 percent to $1.045. It lifted annual earnings 2.1 percent on flat rental income and said it will cut its retail exposure over the next 18 months, with real estate selling at "attractive prices" and the market near a cyclical peak.
Sky Network Television rose 1.7 percent to $2.39, Metlifecare gained 1.7 percent to $6, and Chorus advanced 1.6 percent to $4.12.
Outside the benchmark index, Steel & Tube plunged 18.2 percent to $1.62, the lowest it has closed since May 2001. It expects to post a loss before interest and tax (ebit) of about $38 million this financial year, from positive ebit of $31.1 million a year earlier, and breach its banking covenants after a restructuring that will see it exit its plastics business and write down the value of its assets.
It said normalised ebit would be about $16 million, excluding non-trading costs and impairments of up to $54 million. On a conference call this morning, chief executive Mark Malpass said shareholders could "absolutely" expect a return to profitability in the next financial year.
"When you have downgrades, naturally people start to second-guess themselves, and you can have an overreaction," Ward said. "You have to re-earn investor confidence when you disappoint, and the more often you disappoint, the less likely people are going to give you credit for what you say."
Serko dropped 8.7 percent to $2.74. The online travel booking software developer reported a maiden annual profit ahead of an expansion into the Northern Hemisphere and a planned ASX listing next month.