Synlait Milk is due to report its result on Monday. Photo / NZME
More light will be shed on the state of play with cash-strapped Synlait Milk when it reports its annual result on Monday.
The company has itself “guided” the market to a loss of up to $5 million or profit of up to $5m and investors will be eager to learn more about Synlait’s new, as-yet-unnamed customer, which is expected to put work through its underutilised facilities at Pokeno.
Synlait was in the news this week when its biggest customer, a2 Milk, signalled that it wanted to end the exclusive manufacturing deal it has with the company, in which it has a blocking stake of nearly 20 per cent.
What’s clear though is that nothing will change in the near term for the operations of both companies.
Separately, there was a sigh of relief from investors when Synlait said it had refinanced.
The new banking syndicate members are ANZ, Bank of China, China Construction Bank, HSBC, and Rabobank.
BNZ looks to have dropped out of the fray, while Chinese banks have stepped in.
Jarden analysts Adrian Allbon, Nick Yeo and Ben Gilbert said that from an a2 Milk perspective, shifting English label infant milk formula production to a2 Milk’s 75 per cent-owned Mataura Valley Milk would be consistent with a2′s previously-articulated strategic intent once the current contract with Synlait ends.
“This is also consistent with our current modelling for both companies from 2028 onwards,” the analysts said in a report.
“The surprise factor for us is the early cancellation of exclusivity based on 2023 performance reasons,” it said.
“On this point, a2 Milk referenced indirectly the Synlait’s performance concerns in their announcement in late April 23 but thereafter remained silent on the issue at its recent 2023 result and investor meetings in late August.”
Based on the announcement, the analysts said that there was no change to their current a2 Milk estimates at this stage.
“It’s hard for us to know whether this would help A2 Milk in any potential negotiations around the future ownership of Synlait’s Dunsandel facility,” the analysts said.
“That said, it’s pleasing to have confirmation that the upcoming debt maturities have now been extended, but we suspect the additional prepayment requirement will form a further risk overhang for equity holders until cleared.
“At the upcoming Synlait result, confidence on the new multi-national customer commencing production volumes from Pokeno will be of high importance for Synlait investors to de-risk future a2 Milk concentration and lift plant utilisation,” the analysts said.
Synlait has put its South Island businesses DairyWorks and Talbot up for sale to retire debt.
Not unexpected
Harbour Asset Management senior research analyst Oyvinn Rimer said a separation of a2 Milk and Synlait was “not entirely unexpected” and that a2 Milk was going to try and “wriggle loose” from the exclusivity arrangement.
“I thought it was more likely that they would wait until 2025 and let it roll off naturally and in the meantime look to launch a different infant formula brand altogether outside the ‘Platimum’ brand, which is what the exclusivity arrangement is tied to.”
Rimer said that while there was relief that Synlait had refinanced, it still had to make a “pretty punchy” payment of $130m by March 31 next year.
“So it puts pressure on them to sell DairyWorks,” he said.
Some valuations put DairyWorks as being worth up to $150m.
Plant of the size and scale of Pokeno needed to be near fully-utilised in order to be profitable.
Regardless of the state of the relationship between a2 Milk and Synlait, it is only Synlait that has the official Chinese licence to make a2 Milk’s China label formula for export to the PRC. The licence runs out in September, 2027.
“These two companies are still going to be very important investment partners over the next five years,” Rimer said.
Synlait is about 40 per cent owned by China’s Bright Dairy.
Brokers Forsyth Barr said it had formed three “takeaways” from a recent Fisher and Paykel Healthcare (FPH) investor day.
The first was that the long-term growth runway remains strong and FPH continues to be well-positioned.
The second was that FPH’s gross margin recovery back to FPH’s 65 per cent target will take time.
And the third was that Covid-19 was no “silver bullet”.
“Company commentary and industry insights highlight high flow adoption is taking place but there is unlikely to be a step change in clinical practice change and growth, with FPH needing to continue to invest to grow,” Forsyth Barr said in a report.
“There was little information in the investor day to fundamentally change our view on the outlook, and, if anything, reinforces the significant opportunity ahead. Following recent share price weakness, we upgrade our rating to neutral.”
Jarden analysts have maintained a “buy” rating on KMD Brands, despite the company reporting a material slowdown in activity this week.
The owner of Kathmandu, Rip Curl and Oboz reported a record $1 billion in group sales for the 12 months to July 31 but noted a softening in consumer sentiment in its fourth quarter.
Jarden’s Guy Hooper and Nick Yeo said difficult trading continued in the term but there was room for optimism in the second half of the year.
“August group sales are down 6.4 per cent year on year, maintaining a similar run rate to 4Q23 with Kathmandu the key source of weakness. Looking forward, the wholesale market remains tough as participants look to de-stock and orders have moderated,” they said in a report.
“However, should consumer sales prove stronger than expectations, additional mid-season purchasing can occur which is typically higher margin for KMD.”
Hooper and Yeo said they expected the company to return to growth in the second half of its 2024 financial year, driven by a recovery in activity and the planned rollout of eight new stores, as well as a normalisation of winter weather.
“While there are reasons to be cautious near-term, we believe these are well-reflected in the share price and see a possible return to growth in 2H24 as potential positive catalyst.”
But they noted there are also risks to their positive view, including a worse-than-expected impact from the consumer environment, changes to the competitive landscape and a lack of traction on its growth ambitions.
The analysts lowered their target price from $1.25 to $1.20. Shares in KMD Brands traded yesterday at around 82c.
Global meat company, Brazil’s JBS, faces some environmental opposition to its US initial public offer, which is towards the the year.
The company has a majority stake in New Zealand automation specialist Scott Technology.
A strategic review of JBS’s 53 per cent holding in Scott - whose systems are used extensively in the meat industry - is under way.
Several leading climate, agriculture, and animal non-government organisations held a news conference in front of the New York Stock Exchange recently to warn the financial sector about the certain risks associated with supporting and investing in JBS, the world’s largest meatpacking company.
Industrial livestock production is one of the largest sources of emissions fuelling climate change.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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