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Synlait Milk (SML)

IRG

Wednesday 25th September 2013

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Synlait Milk (SML) is a dairy processing company based in the Canterbury Region of New Zealand and is the latest addition in the primary-dairy sector listed companies of New Zealand Stock Exchange. Synlait’s business model is to supply specialised high value dairy ingredients to leading milk-based health and nutrition companies internationally. The customers are generally in Asia, but Synlait have also developed significant business in the Middle East, Europe and Africa. In November 2010, a Shanghai-based dairy company, Bright Dairy, invested in Synlait Milk, acquiring a 51% shareholding. On 23rd July, 2013 Synlait started trading at NZX with an Initial Public Offer Price of $2.20. Netherlands-based cooperative Royal Friesland Campina became a major shareholder in the Synlait Milk float (7.5%), joining Bright Dairy (39.1%) and Japan's Mitsui & Co (8.4%) as major shareholders in Synlait.

Performance

Since inception, Synlait have achieved growth in sales volumes of 163% between FY2009 and FY2012 with an increase of 501% in underlying gross profit over the same period. There has also been a corresponding increase in investment in fixed assets from $103.7 million in FY2009 through to $214.1 million in FY2012. However, FY2012 was the first year in which Synlait made a net profit. Synlait managed to grow their contracted milk supply base from 14.4 million kg MS in FY2009 to 37.6 million kg MS in FY2012.

Synlait  announced an after tax profit for the FY13 year  of $11.5 million, ahead of the prospective financial information (PFI) and a significant increase on last year‘s $4.4 million. Total sales for the FY13 year were $420 million, slightly behind PFI of $426 million however, well ahead of last year’s $377 million. In FY2013 the Company achieved a pre-tax return on capital employed of 13.1%.

RESULTS OVERVIEW

• Revenue up 11.5% to $420 million
• Gross Profit up 39.6% to $65.1 million
• Gross profit per MT up 26.4% to $751
• EBITDA up 74.0% to $38.5 million
• Net profit after tax up 161% to $11.5 million
• Shareholders funds up 90% to $164 million
• Adjusted returns of capital employed up 79.5% to 13.1%

Outlook
The immediate future for Synlait Milk will be focused on delivering quality added value ingredients and nutritional products to an expanding customer base and executing on the growth initiatives as detailed in the Investment Statement and Prospectus.

FY 2014 OUTLOOK
• First half sales of infant nutritionals likely to be affected by announcement of new Chinese regulations and NZ food safety issues.
• However still expect to achieve forecast sales of 10,000 MT of infant nutritionals this year.
• Now forecasting to take a significant allocation of DIRA milk this season.
• Focus is on successful execution of growth initiative projects.
• Maintain guidance to be in line with prospectus forecast results.

Important Indicators

The near nationwide drought in New Zealand was a major factor in the sudden rise in global dairy prices in April 2013. In addition to the drought there is growing pressure on the balance between supply and demand for dairy products in international markets.
Higher prices will inevitably lead to consumer resistance away from dairy, while at the same time in Europe and the United States of America higher prices are encouraging increased production. Global grain prices, which have eased, are expected to encourage increases in supply out of the United States of America. The removal of milk quotas in the European Union in 2015 will see production increases, however as Western market economies continue to stabilise and recover and emerging markets continue to grow dairy industry will also see increased demand.


DISCLAIMER: To the extent that any of the content above constitutes advice, it is general advice that has been prepared without reference to investor’s objectives, financial situation or needs. Before acting on any advice, investors should consider the appropriateness of the advice and IRG recommend that investors should obtain appropriate financial, legal and taxation advice before making any financial investment decision. The report is based on information compiled from public information and private research. IRG have completed the report on a best endeavours basis and do not accept any liability of loss or damage. IRG suggest that clients use this as part of a decision making process and check key data before making any investment decisions.
Employees may have an interest in the securities discussed in this report.



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