The forecast is largely driven by a 23% increase in canned infant formula volumes to 43,750 tonnes, Morgans’ analysts Kurt Gelsomino and Belinda Moore said.
A2 Milk’s 47% lift in formula sales and the strong Lyttelton Port data suggest the company is on track to hit the higher end of the range, they said.
Total formula exports from Lyttelton to Australia, China and Hong Kong rose 38.4% for the 12 months to June 30 and 29.6% for the 12 months to July 31.
Synlait forecast production of 41,000-45,000 tonnes of canned infant formula in the year to July 31.
Morgans also said Synlait has doubled its lactoferrin production capacity to 36 tonnes and Synlait forecast production of 27 tonnes in the year to July 31.
With pricing reportedly strengthening since the first half result Morgans expects the second half gross profit margin to be around $550,000 a tonne and FY19 lactoferrin gross profit of $12.2 million compared to $4.4m in FY18.
“Lactoferrin comprises around 6% of our FY19 gross profit forecast and the favourable pricing environment is providing an earnings tailwind,” Morgans said.
It also forecasts 7% growth in Synlait’s annual ingredient sales volumes.
Synlait is due to report on Thursday but has not provided earnings guidance.
It said profitability is expected to increase at a slower pace than last year’s 89% jump to $74.6m.
Morgans expects Synlait to provide guidance on infant formula sales volumes for this financial year. The research house forecasts 51,600 tonnes for the 2020 year, up 18%.
Morgans predicts Synlait will report a net profit of $104.5m for this financial year, up 19%, rising to $126.7m in the 2021 financial year.
The researchers lowered their price target for Synlait to A$9.60 from A$10.10 because of the weaker New Zealand dollar. The stock recently traded at A$8.80 on the ASX and at $9.44 on the NZX.
“We remain attracted to Synlait’s position as a leading manufacturer of value-added dairy products, its strong value chain, positive leverage to A2 Milk’s infant formula growth in China, capacity to capitalise on a favourable lactoferrin pricing environment and solid return on capital profile, particularly relative to other dairy peers,” the analysts said.
They also expect an update on Pokeno’s commissioning timeline after the company appealed against the reinstatement of land covenants on the site.
Synlait’s February 2018 land purchase there was conditional on the seller, Stonehill Trustee, procuring the removal of the covenants that restrict the site’s use to grazing, lifestyle farming or forestry. A High Court decision in November removed the covenants so Synlait took the title of the land.
However, the owner of adjacent land, Ye Qing, won in the Court of Appeal in May, overturning the decision to remove the covenants.
Synlait filed an application to appeal to the Supreme Court to have the decision reviewed in June. A hearing has been scheduled on October 21 to consider whether leave for an appeal will be granted.
Synlait has reiterated Pokeno’s timeline remains unchanged and it expects to commission the plant in line with its original target of late September.
It has also said it does not expect the legal proceedings will affect its ownership or future use of the plant and believes the market has overestimated the cost of any potential settlement.
However, the issue is overhanging the stock and it continues to see a timely and cost-effective resolution as an important catalyst to derisk Synlait’s growth outlook and support a rerating, Morgans said. – BusinessDesk
