Saturday, March 30, 2024

Synlait’s asset growth clips profit

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Synlait improved both revenue and earnings before tax in the 2020 financial year, while paying its 250 farmers an average milk price of $7.30/kg milksolids, 11c higher than Fonterra.
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It is the second year Synlait has bettered Fonterra after a decade of being up to 27c behind its much bigger rival.

When asked for a reason why, Synlait said the milk price was set to be competitive and was based on product prices, costs and foreign exchange.

Chief executive Leon Clement said the average incentive and premium payment for FY2020 was 25c/kg, up from 18c the previous year, added to the base price of $7.05 (Fonterra’s was $7.14).

Some suppliers could be earning up to 50c from the Lead With Pride and A2 milk premiums, while a few received just the basic milk price.

The current forecast for the FY21 milk price is $6.40, recently increased from $6.

Milk supply went up 20% to 76.5 million kg in 2019-20, as 55 farms in the North Island supplying the new Pokeno plant contributed 13% of the total volume.

Supply is also forecast to grow a further 13% this year in the South Island, where 22 additional farms have joined.

Growing supply to the Dunsandel plant in Canterbury would enable more optimisation of products in the north, where Pokeno could increase infant formula base output.

Clement mentioned a new multinational customer opportunity now under discussion for that Pokeno output, which would be earnings positive in FY23 when it proceeded.

He would not disclose any more about the new customer, but it presumably does not compete directly with A2 Milk Company, which owns 20% of Synlait.

The Munchkin grass-fed infant formula opportunity for the United States had not gone away but approval from US authorities could not be progressed.

The 2020 results were all positive except net profit, which fell 9% to $75 million.

The reasons for the fall included new investments in facilities and acquisitions and their related depreciation and debt costs.

Revenue was up 27% to $1.3 billion and earnings before interest, taxes, depreciation, and amortization (Ebitda) up 13% to $171m.

Consumer-packaged infant formula sales were up 15% to 49,180 tonnes.

Lactoferrin sales were up 45% to 30t and the lactoferrin capacity is reaching its limit.

Synlait expanded its assets by 65% to $1.043bn in the latest financial year, acquiring Talbot Forest Cheese and Dairyworks, and building the Pokeno plant.

Therefore, net debt went up $193m to $527m as its debt leverage ratio increased to 3.1 times, still within banking covenants.

As loans mature in the next year, chief financial officer Angela Dixon said all avenues of raising capital and rolling over loans would be considered.

After the expansion phase and a consequence of the higher assets, return on capital employed was down to 12.6% compared with 18.3% last year and 22.7% in the previous year.

Clement said the next phase for the company would be one of harmonisation on the local market between Talbot Forest and Dairyworks, consolidation, throughput and margin improvement.

Higher inventories at balance date amounting to 63% more, being $270m, were explained by the new subsidiaries, sales growth in infant formula base, customer demand and optimisation of assets.

An interesting presentation in Synlait’s annual report showed the switch around in revenue between fat and protein over the past four years.

In FY17, protein was worth 1.4 times that of fat and in the latest results only 0.5 times, or half as much as fat.

The flow-on effect was that Synlait paid farmers $356m for the fat component last year, compared with $165m in FY17.

Clement said that processing optimisation was impacted but the company was not signalling a change in milk composition to its farmers.

After the results announcement Synlait shares fell 7% to $5.62, having been as high as $9-plus a year ago.

Some of the retreat could be attributed to the slide of A2 shares, down from $21 in August to $16.50 presently.

A caution from A2 published on the same day as Synlait’s results said that infant formula sales to China through daigou sales had suffered under covid-19 restrictions and the lack of Chinese students in Australia and New Zealand.

A2 said its revenue expectation for FY21 was now $1.8 to $1.9bn, compared with $1.73bn in FY20.

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