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Dairy company Synlait says it is 'continuing to experience significant uncertainty' within its business; has 'proactively engaged' with bankers to increase leverage ratios on its covenants

Dairy company Synlait says it is 'continuing to experience significant uncertainty' within its business; has 'proactively engaged' with bankers to increase leverage ratios on its covenants

Dairy company Synlait Milk says it has "proactively engaged" with its bankers to increase its leverage ratios on its covenants as it is now forecasting a "broadly breakeven" full year financial result to the end of July.

The company made these comments on Monday as it reported a 76% plunge in half-year after tax profits to just $6.4 million.

Earlier this month Synlait had removed earnings guidance made only two months earlier in the face of significant uncertainty.

The company had 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. Then it flip-flopped in December, saying that profits for the year would be HALVED, and now it says "broadly breakeven".

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 39%.

In its statement on Monday, Synlait said while all banking covenant ratios were met during the first half of the year, Synlait "has proactively engaged with its banking syndicate to increase its leverage ratios to manage any risk at the end of FY21".

"The company’s FY21 business plan is fully funded by its current banking syndicate."

This is the detail of Synlait's first-half performance:

• Revenue up 19% to $664.2 million
• EBITDA down 29% to $47.7 million
• NPAT down 76% to $6.4 million
• Consumer-packaged infant formula sales down 16% to 18,085 MT
• Lactoferrin production up 16% to 13.6 MT
• Dairyworks revenue $112.6 million

The company cited these factors as being key parts of the uncertainty it faces:

• Ongoing uncertainty in The a2 Milk Company’s expected demand for the remainder of FY21 and FY22. Synlait does not currently have sufficient confidence to forecast when this recovery will occur. The resulting impact of this on Synlait’s business is two-fold: demand for consumer-packaged infant formula remains uncertain, which in turn impacts forward infant base powder production and asset use.

• Synlait’s ingredients business. The sudden drop in consumer-packaged infant formula demand, combined with rapidly rising Global Dairy Trade prices, foreign exchange, and a changing product mix, creates volatility which limits returns.

• Our expectation is that global shipping delays will continue and further impact the FY21 result.

Board and management have considered the above factors and how they will impact Synlait’s FY21 profitability. There is still a range of scenarios contributing to the company’s profitability, and our current outlook suggests a broadly breakeven FY21 NPAT result.

Synlait Chair Graeme Milne said the first half was challenging, "and we continue to find ourselves in a period of significant uncertainty and volatility as Synlait faces into several headwinds".

"This is impacting our short-term operations and will impact our full year 2021 financial result (FY21).”

Synlait chief executive Leon Clement said the company could not control Covid-19 "but we can control our response".

"Our focus is now to mitigate the impact Covid-19 has had on our customers, as we manage costs and capacity and pull forward value creation initiatives to accelerate the execution of our strategy,” he said.

“We will need time to get through this, but we remain confident about our future. Our investment phase is complete. We have the capacity, capability, and customer base to generate significant value. Covid-19 hit us late, but we will emerge from the pandemic a stronger, more sustainable Synlait."

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9 Comments

Thankfully New Zealand s economy is not reliant on housing milk or tourism. Both Synlait and A2 trading near new monthly lows. The fall in valuations is remarkable given that almost everything including the kitchen sink have been given handouts.

The fall in valuations is remarkable given that almost everything including the kitchen sink have been given handouts.

Has Synlait been given handouts? I don't think so.

Legislated leg up in a subsidised milk from Fonterra?

That ended for synlait quite a number of years ago.

More to come I guess. Post pandemic, the world may suddenly realise that there's nothing special about NZ milk and they'd overpaid for it.

Hmm, corporate model vs cooperative?
Perhaps Rabobank have been correct all the way through, acknowledging farmer cooperatives as the most resilient vehicle for export trading ag product.

I'm sure there's a slight smile appearing on the faces of the fonterra board at this.
No mention in there of the pressure from the higher payout?

COVID -19 has also put a major dent in global birth rates. Who needs baby formula now?

no problem

just add leverage

Stir