Synlait almost triples 2016 profit, warns of 'modest growth' next year

Monday 19th September 2016

Synlait Milk, the NZX-listed dairy company, almost tripled annual profit in line with its forecast, although it warned growth in the coming year would be more modest as new Chinese regulations disrupt infant formula sales.

Underlying profit rose to $32.7 million in the year ended July 31, from $12.2 million a year earlier, the Rakaia-based milk processor said in a statement. That's in line with its forecast last month of between $32 million and $33 million .

Net profit, which includes the reversal of a year-earlier $1.7 million loss related to inventory financing, increased to $34.4 million, in line with guidance of between $34 million and $35 million, and up from $10.6 million the previous year, it said. Revenue jumped 22 percent to $546.9 million.

Synlait posted its largest profit since listing in 2013 when it raised $75 million to invest in new plant and ramp up production of higher-margin products. Today the company said it planned to raise a further $98 million in a rights offer to expand its infant formula manufacturing, consumer packaging, infrastructure requirements and value-added cream manufacturing.

“Synlait is a growth company. Our FY16 performance highlights the progress we’ve made since our IPO in 2013 towards our aspiration of making more from milk,” said chairman Graeme Milne. “We are looking at investing approximately $300 million in capital growth projects over the next three years to solidify this position and continue pursuing profitable opportunities to make more from milk.”

Under the rights offer, eligible shareholders will be entitled to acquire two new shares at $3 apiece for every nine existing shares held on the Sept. 21 record date. The company's largest shareholder, China's Bright Dairy, intends to participate in the offer to maintain its 39 percent holding. The offer for up to 32.5 million new shares is underwritten by First NZ Capital Securities, excluding the entitlements of Bright and Munchkin.

The shares last traded at $3.62, and have gained 15 percent this year.

Synlait's gross profit per tonne jumped to $859 in the latest year, from $567 a year earlier as it benefited from increased sales of higher-margin canned infant formula products and manufacturing efficiencies from increased volumes.

The company warned that its profit expectations for the 2017 financial year "show only modest growth" due to likely disruptions from proposed Chinese regulations aimed at reducing the plethora of brands in the market.

The regulations require manufacturers of infant formula for export to China to register their recipes with Chinese authorities by January 2018. As many as nine distinct recipes can be registered under a maximum of three brands, for an initial five-year period.

Synlait said it's "well positioned" for the new regulations, and is working through its strategy with infant formula customers exporting to China, including A2 Milk Co, Munchkin and others.

"While Synlait will not be able to register and supply all brands of canned infant formula we currently manufacture, we expect the volumes we supply to the three selected brands will grow commensurately, and we also intend to work with the other brands through third-party arrangements where possible," the company said. "Proposed Chinese regulations (are) likely to moderate canned infant formula growth in FY17 as disruption works through industry-wide supply chains but normalise in the longer term."

Synlait said investment with customers such as US-based Munchkin would help support volume growth and reduce reliance on the Chinese market.

It expects canned infant formula volumes to grow by 2,000 tonnes in the 2017 financial year, and by another 10,000 tonnes in 2018. Growth of base infant powders is expected to be flat in 2017 followed by an increase by 4,000 tonnes in 2018.

It plans to invest between $5 million to $6 million in customer, market and product development opportunities and continue to improve its internal business processes "which will largely offset our anticipated margin growth"

The company also said it is seeking a foreign exempt listing on the ASX to meet interest from Australian investors and expects its stock to start trading across the Tasman before the end of 2016.

Separately, Synlait revised up its forecast 2016/17 milk payment for farmer suppliers to $5 per kilogram of milk solids from $4.50/kgMS, reflecting recent improvements in dairy commodity prices. It confirmed a total milk price of $4.02/kgMS for the 2015/16 season, which consists of a $3.91/kgMS base milk price and an average of 11 cents/kgMS for special milk and seasonal premiums.

BusinessDesk.co.nz

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