Investors should steer of the Fonterra Shareholders' Fund, which seeks to raise up to $525 million to reduce the dairy cooperative's redemption risk, until the units start trading, according to Morningstar Research.
However, the units have too many pricing uncertainties in the bookbuild phase.
The research firm gives a "do not subscribe" recommendation for the fund's initial public offering, saying Fonterra Cooperative Group lacks pricing power over its dairy commodities, generates low returns compared to its multinational peers, and investors won't know the price they are paying until after the bookbuild process is completed on November 27.
The float has an indicative price range of between $4.60 and $5.50 per unit, though Fonterra has discretion to price it above that range.
Morningstar estimates fair value at $5.50 per unit. Institutional investors report demand for the units has been heavy and scaling of applications is anticipated in order to meet demand.
"Our main concern is that prospective investors won't know the price they are paying and quantity of shares they would be receiving until after the bookbuild process is completed," analyst Nachi Moghe said in his report.
"As a result of this uncertainty, we would advocate investors wait for the units to list on the market and consider buying at a price below $4.95 per unit."