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Synlait shares jump as result allays fears about Fonterra-A2 tie up

Wednesday 21st March 2018

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Shares in dairy company Synlait Milk jumped 9.9 percent after the company posted a record first-half net profit on increases in the manufacture and sales of high-margin products and its relationship with a2 Milk. 

Profit jumped to $40.7 million or 22.69 cents a share in the six months ended Jan. 31, from $10.2 million, or 6.34 cents, a year earlier, the Rakaia-based company said in a statement. Revenue jumped to $439.3 million from $288.7 million in the prior period.  

Looking ahead, Synlait said the second half is not expected to be as strong as the first half due to lower sales margins but "we continue to forecast strong overall earnings growth for the full year. Looking forward into FY19, ongoing growth in infant formula volumes are expected to continue to grow earnings." In 2018, Synlait had net profit of $38.2 million and revenue of $759 million.

The shares last traded up 9.9 percent at $8.89 after briefly touching a record $9.30 as the result and the forward-looking guidance helped allay any concerns investors might have had after a2 announced a new supply arrangement with dominant dairy company Fonterra Cooperative Group in February.  That deal prompted a joint release from a2 and Synlait stating the new relationship doesn't change Synlait's exclusive infant formula supply arrangements with a2.  

The stock was sold down heavily on February announcement but today's "fantastic result and the fact that they reaffirmed future growth has soothed investors concerns," said Hamilton Hindin Greene broker Grant Williamson. 

Synlait's chief executive John Penno said the company's relationship with a2 Milk "continues to strengthen where we remain their exclusive manufacturer for the important Australia, New Zealand and China market." 

“The growth trajectory of canned infant formula has continued with total consumer packaged volumes almost tripling from the same period last year and up 36 percent on the second half of last year,” Penno said.

Penno also said the company has "also renegotiated our supply agreements with New Hope Nutritionals and with Bright Dairy, which provides for four-fold volume growth over a five-year period. However, we don’t expect this to impact sales until FY19" as China Food and Drug Administration registration is still pending. 

"While we are confident registration will be achieved and these processes are well underway, the time taken to negotiate these agreements means we expect registrations to be progressively granted in late FY18 and the first half of FY19. This is well after the deadline of 1 January 2018, which is when unregistered products can no longer be imported. We anticipate that this will delay significant orders for these products into early FY19," it said. 

Synlait also said a slower than expected process to receive regulatory approval to begin the sale of Munchkin’s Grass Fed infant formula in the U.S. market is also delaying expected manufacturing volumes. "While we remain excited about the potential of our partnership with Munchkin, and confident of eventual approval from the U.S. regulatory authorities, significant increases in manufactured volume has been later than we initially anticipated," it said. 

In the six month period Synlait has invested $34.5 million in capital expenditure throughout New Zealand. The major components were the Synlait Auckland blending and canning facility, where it spent $11.2 million, and the new wetmix kitchen at Synlait Dunsandel, which cost $18.4 million. Synlait also established a new research and development centre in Palmerston North.

“Both of these projects are critical for keeping up with customer demand, and give us the ability to expand on our infant formula business,” said Penno. 

He also said that Synlait’s cash flow generation of $204.3 million for the 12 months to Jan. 31 has fully funded the capital expenditure program and has enabled the reduction of debt to low levels.

Total net debt for in the first half of the year was $49.7 million, down from $147 million in the same period a year earlier. 

“This leaves the company well placed to fund our expansion plans. At Synlait Dunsandel we expect to spend $125 million on an advanced liquid dairy packaging facility, and at Synlait Pokeno we will spend $260 million to establish our new nutritional powder manufacturing facility,” said chairman Graeme Milne.

Penno also said that Synlait’s full-year spend on research and development is forecast at $7 million versus $4.75 million in the prior year. "We intend to lift this to 1.5 percent of revenue within the next few years, which will see it double again." 


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