Synlait Milk returns to profit after record loss during pandemic

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Synlait Milk returned to profit after posting a record loss during the pandemic.

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Synlait Milk returned to profit after posting a record loss during the pandemic.

Synlait Milk is on track to rebuild profits after posting its biggest ever loss during the Covid-19 pandemic, but investors remain cautious.

The Dunsandel, Canterbury-based milk processor made a profit of $38.5million in the year to July 31, compared to a loss of $28.5million the year before, in line with expectations .

Synlait has been caught in the turmoil of its biggest customer, The a2 Milk Company, during the pandemic as orders from the key Chinese market first surged as families stocked up on infant formula, then crashed when pantries were full, resulting in excess inventory. This is rebalancing now, with Synlait reducing inventory by 40% last year, boosting cash flow and allowing it to pay down debt.

“They’ve done a phenomenal job coming back from what was just a terrible year last year,” said Oyvinn Rimer, senior research analyst at Harbor Asset Management. “It’s good to see them back, and it’s good to see the return to profitability.”

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Still, Rimer said that like other dairy companies, Synlait had to invest a lot to realize its profits.

He said it was disappointing that Synlait had reduced its capital return expectations in its long-term strategy through 2027 to 15% from 20%.

“That probably suggests they don’t think they’ll generate as much return per dollar of invested capital in the future,” he said.

Before the pandemic, Synlait spent $280 million on a new plant at Pokeno in Waikato, $125 million on a new liquids plant in Dunsandel, and $150 million to buy cheese companies Talbot Forest Cheese and Dairyworks as it sought to diversify its products, its markets and its customers. away from its heavy reliance on A2.

He spent another $70 million to outfit Pokeno to make plant-based milk for a new multinational customer he did not name, citing commercial sensitivity.

Synlait is trying to reduce its reliance on A2 as the specialist milk distributor seeks to move more manufacturing to its own majority-owned plant in Mataura Valley in Southland.

Craigs Investment Partners investment adviser Peter McIntyre said there were concerns over Synlait’s ability to replace A2 volumes.

Synlait revealed some details around its new multinational client for Pokeno.

“That’s the big unknown in terms of success,” Harbor’s Rimer said. “I think Synlait has high hopes that this will be a great partnership and that it will be profitable.”

Synlait expects to begin distributing the herbal product in Southeast Asia from the second quarter of this fiscal year, and in Australia and New Zealand by the end of calendar year 2023.

“It would be great if they were able to get another type A2 client,” Rimer said.

RNZ

Today on The Detail, Emile Donovan sits down with Sam Dickie, Senior Portfolio Manager at Fisher Funds, to talk about the company’s rollercoaster ride and how one of its greatest strengths became its greatest weakness.

Forsyth Barr analyst Matt Montgomerie said it was still very early in Synlait’s turnaround.

“There’s still a lot of work to be done for investors to gain confidence from here,” he said.

Investors wanted to see the company diversify its revenue away from its reliance on A2 and improve utilization of its Pokeno plant by adding more customers.

He noted that China’s re-registration process for infant formula was a major risk facing the company.

Synlait holds the Chinese A2 brand infant formula manufacturing license and is working on re-registration under the new food safety legislation in China.

The company said securing re-registration was a “top priority,” although it did not expect the process to affect infant formula volumes. It has approval under its current registration until the end of February next year.

Synlait said that by the end of this fiscal year, he will have completed his two-year recovery. It expects to enter fiscal year 2024 with a level of profitability similar to that experienced before its fiscal year 2021.

Jarden analyst Adrian Allbon noted that the average profit over the years 2018 to 2020 was $77 million, ranging from $75 million to $82 million.

Still, Synlait said it was managing several risks, including the Chinese product re-registration timeline, a tight labor market, high inflation and supply chain pressures – all of which could have a big impact on its forecast for this year.

Shares of Synlait closed down 5.3% at $3.37 on the NZX on Tuesday.

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