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Dairy company Synlait says it is continuing to experience significant uncertainty and volatility within its business

Dairy company Synlait says it is continuing to experience significant uncertainty and volatility within its business

Dairy company Synlait Milk has withdrawn earnings guidance made little more than two months ago as it says it continues to experience "significant uncertainty and volatility" within its business.

The company's share price dropped nearly 12% to $3.40 in early trading on the NZX on Thursday. The stock's now down about 35% in the past 12 months. In November 2020 the company had a $200 million capital raising in which shareholders paid $5.10 each for new shares.

Having said as recently as September 28, 2020 that it was this year aiming for an after tax profit that would be a "slight improvement" on last year's $75.2 million, and then flip-flopping in December and saying that profits for the year would be HALVED, it now says even that target "will now not be attainable".

So, it now has no guidance for the year to July, 2021, but says it will update the situation when it announces half-year results on March 29.

Synlait's woes are related to the woes being suffered by a2 Milk Company (ATM) as a2 is a "strategic partner" as well as a 20% shareholder. The biggest shareholder in Synlait is China's Bright Dairy Holdings with 30%.

When Synlait took the axe to its forecast in December this followed an adverse market update - and severe downgrade in forecast - from a2. And now of course a2 has downgraded its prospects again.

"Synlait’s most recent guidance update was released on Monday 21 December 2020 following receipt of a revised demand forecast from the company’s cornerstone shareholder and strategic partner, The a2 Milk Company Limited," Synlait said.

Since then, it said, "several new factors have emerged" that are expected to adversely impact FY21 earnings:

• The ongoing uncertainty of The a2 Milk Company’s expected demand for the remainder of FY21 and FY22, as it continues to rebalance inventory levels, and recovers from the impacts of COVID-19 on the Daigou and CBEC channels.

• The resulting impact of the above on Synlait’s manufacturing recoveries, which sees infant formula base powder production dropping significantly as outputs and inventory levels reset to a new outlook.

• The impact of global shipping delays which is expected to continue for some time and may still further impact the FY21 result.

• The ongoing volatility in commodity prices.

"Given the significant volatility and uncertainty that is affecting Synlait at this time due to the above factors, the company’s Board and Management see a broad range of outcomes still possible in FY21. However, the company’s previous guidance, that the overall FY21 NPAT result will be approximately half that of the FY20 NPAT result, will now not be attainable."

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What effect will a2 buying Mataura Valley Milk have on Synlait. Does Synlait risk losing the a2 infant formula contract once a2 gets up and running at Mataura. Similarly, what are the risks to a2 if it can't get enough milk in Southland?

I expect that a2 and Synlait will remain joined at the hip. Remember, a2 owns 20 percent of Synlait and Synlait holds relevant certifications for China. Synlait also has expertise and a track record that Mataura will take many years to build. But let there be no doubt that this is a very cold breeze that Synlait is experiencing and it is a reminder how much Synlait relies on its a2 alignment. The removal of guidance by Synlait also underlines the challenges at a2, which has hit a big pot-hole after five years of extraordinary growth

Thanks Keith. Appreciate the reply

They should ask their majority chinese shareholder to get the chinese authorities to give A2 milk an open ticket at the port, then A2 shares would be $25 and Synlait shares $10. The chinese damand for A2 is there.

To the best of my knowledge, border issues have never been constraining.

I thought they had problems with 'channels' to the chinese market ?

Mentioned this yesterday, that raw milk price is a big hurdle to profit, without the A2 problems to add.

I am not a shareholder, but any company that goes from announcing that it expects a slight increase in profits to declaring that it will be halved in the space of just 3 months, should be the subject of an in-depth investigation by the FSA. Were there any significant share deals by directors over that period?
Heads should roll.

Most - possibly all - of the directors - purchased shares a couple of months ago at the time Synlait was raising capital.
There have been no recent notifications to the NZX of directors selling shares.
Yesterday's GDT auction will put pressure on Synlait re farmer payments with consequent pressure on profits. That may well have been the final straw leading to the announcement today.
HY1 results are due 29 March.

Short and distort?

Surely pent up demand, supply constraints etc form a basis for escalation in price of product? Enough to hurdle the raw milk price?