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Allan Barber likes the new Synlait offer and the new chance to invest in the sector. He explains why

Rural News
Allan Barber likes the new Synlait offer and the new chance to invest in the sector. He explains why

By Allan Barber

Synlait Milk’s $120 million capital raising will enable the company to restructure debt and invest in several new initiatives, including a lactoferrin plant, a third dryer, a butter plant, testing laboratory and dry store.

The share offer is made up of $75 million of new capital and $45 million sell down by some of the exiting shareholders.

All the signs point to this capital raising being a success, unlike the attempt to raise $150 million in 2009 which was shunned by New Zealand investors.

Much has changed in four years.

The New Zealand economy is now on a substantially stronger footing, Synlait has put runs on the board and a Chinese company, Bright Dairy, was willing to invest $82 million in the business.

Synlait is well structured to avoid the angst about overseas investment because majority locally owned Synlait Ltd owns the farms separately from the milk business, with Japanese company Mitsui the minority shareholder.

This structure ensures there is no argument about the sale of New Zealand land to foreign investors which was such a large feature of the Crafar farms purchase by Peng Xin.

It has ensured that Synlait is well placed to take advantage of the fast growing Chinese demand for infant milk formula as well as being exposed to other growth markets.

The new capital investment programme will enable Synlait to move swiftly into higher growth products than its present bias towards whole and skimmed milk powder.

Synlait is obviously much smaller than Fonterra, but it is now in a position to offer public investors, both New Zealand and overseas, the chance to invest in our agricultural sector.

There haven’t been too many opportunities to do this, let alone in the added value end of the market.

There seems to be a pattern here. Local entrepreneurs start up a new business which fails to attract New Zealand investment and, consequently, overseas capital is the default option. Alternatively a New Zealand company, for instance PGG Wrightson and F&P Appliances, needs external capital to ride out tough conditions and has to find it overseas.

In the case of companies that have got into trouble, the overseas investor soon takes control.

But in Synlait’s case a good business model has made it possible to retain a strong New Zealand involvement.

We might have preferred 100% ownership, but the events of 2009 made that impossible, and what we have now got is committed shareholding by a Chinese company which will assist expansion ambitions.

In my view Synlait meets all the criteria for overseas investment.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here »

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4 Comments

In my view Synlait meets all the criteria for overseas investment.

and........

 

What about local investment (or is that where you are foxing us).... What do you make of it.. How would the $2 something share get to $5? What are we missing.......

 

Speed reading http://www.synlait.com/about/news/

We can't see what the dividend is

We see insiders selling out

We see new money in, repaying debt (rather than company profit and performance)

We see new money in being the deposit used to borrow more mony (!80m odd) of new capex.

We see no feasibility and or expected returns on that capex spent.

We see infant formula being produced on contract (so no branded product business)

We see export agents and international brokers wholeslaing, but costs not shown (probably 10% plus of revenue).

We see Bright keeping control with 4 of 8 directors.

We see farmgate price only matching Fonterra's

 

We see Ag flow cracking on, but at US$3,300/$3,500 per tonne (as do ANZ and Rabobank). At higher prices production from other world countries comes in...

We see production reducing due to N compliance

 

Q: if you had $500,000 to invest in listed Ag would you give it to the above, put it into Fonterra, or WBC http://www.asx.com.au/asxpdf/20130418/pdf/42fblqh7nnytlv.pdf

WBC have a jv with Tatua to construct a lactoferrin plant..

 

or should me put money in the parent:

http://en.brightdairy.com/home.php

http://www.chinesestock.org/shlistd.asp?id=600597

or put in SML, but like Mighty River wait a couple of months...

 

the overseas investor has control. No?

 

P.S.

The farms are well away - http://www.unlisted.co.nz/uPublic/unlisted.mt_public.securityDetail?p_p… their shares at the get go thought to be $1.45.

 

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with Bright Dairy effectively being able to appoint 5  of the 8 directors  (4 Bright get to appoint exec director) .......no thanks

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Postcard from Gummy Bear....

Gummy Bear Hero (Philippines) 09:55 AM Monday, 1 Jul 2013 Synlait is a low margin commodity producer , with massive capex requirements ..... not so far removed from the languishing newspaper companies , such as Fairfax ......
...... Kiwi investors are smarter than that , and placing their monies into booming hi-tech ventures 'like Diligent ...... and Rakon ..... oooops .... should've been more diligent there ... http://www.nzherald.co.nz/best-of-business-analysis/news/article.cfm?c_…   The PR Push: http://www.nzherald.co.nz/agriculture/news/article.cfm?c_id=16&objectid…

"Through the IPO we believe it will bring more resources into the company to help it improve and develop faster over the next several years," says Ke Li, Bright Dairy's marketing whiz, and until recently a Synlait director.

"We strongly believe that after the IPO the performance of the company will benefit every shareholder."

The offer documents point to a net profit of $10.84 million for the current year ending July 31, up from $9.31 million in 2012.

The documents point to a $19.67 million net profit for 2014.

Much of the projected increase in earnings will come from a lower interest bill resulting from proceeds of the IPO - down to a forecast $4.76 million in 2014 from $12.43 million in the current July year.

http://www.nzherald.co.nz/agriculture/news/article.cfm?c_id=16&objectid…

Although the IPO is expected to dilute Bright's holdings down to 37-41 per cent, Synlait remains the focus of its New Zealand operations. "We want to build Synlait bigger and stronger, and especially get more involved in high value-added products," says Ke.

Synlait has been quickly integrated into Bright's strategy for the Chinese dairy market, with the premium end of the infant milk formula segment well-targeted.

 

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What happened to him here?  I'd noticed him being MIA but didn't want to ask for fear it might be bad news. 

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