Synlait has invested heavily in manufacturing plant at Pokeno. Photo / NZME
Synlait Milk’s three independent directors have the complicated task of ensuring the company’s survival while also doing the right thing by its beleaguered shareholders who don’t represent interests associated with Bright Dairy or the a2 Milk Company.
Any day now the company will announce plans for a capital raise and bank refinancing in part to deal with $180 million in bonds that fall due in December. The company’s market capitalisation is currently a mere $62 million and it needs to raise funds in the hundreds of millions.
“The task ahead is a complicated one,” independent chairman George Adams told the Herald after last month’s special shareholding meeting to approve a last-minute $130m lifeline loan from Bright.
“It is certainly challenging to have that conversation with retail shareholders, and even the institutions frankly, so we have got to look carefully at coming up with a solution that delivers sufficient capital into the business, and at the same time with a high degree of assurance that we are going to be able to raise it, which obviously means talking to our larger shareholders.”
The easy way to execute this is probably a direct placement at prices reflecting current market value to interests associated with Bright, which controls the board with its 39% shareholding and has shown an appetite for brinkmanship.
It is hard to imagine any such planning not to involve A2, which holds 19% and would dearly love to get its hands on Dunsandel, the golden goose.
The key issue a recapitalisation presents for both retail shareholders and institutions (making up circa 41% of the shares in Synlait) is that the current share price is a million miles away from the intrinsic value of the company.
The fact is the market has fallen out of love with Synlait and lacks confidence in both the board and management. This fact may prove useful when it comes to trying to convince independents to accept some hugely dilutive deal or face the consequences, but it is not the full picture.
Synlait’s current share price suggests the business is worth $62m. Yet when you look at the sum of the assets and strip out debt the value of the business is conservatively worth just over $600m.
In other words, Synlait is worth more dead than alive under any scenario to resuscitate the business that does not reflect its intrinsic value.
So, it will be interesting to see how Adams and his fellow independent directors, Paul McGilvary and Paul Washer, try to deliver on the company’s growth potential to the benefit of all shareholders – not just Bright and possibly/likely A2 Milk.
One option, of course, is for them to seek a renounceable pro rata offer that allows everyone to participate.
But the question remains as to how that would be acceptable to small parcel shareholders who can see themselves better off with a liquidator dealing to the assets, even under a fire sale.
Under that scenario, A2 would put its hand up immediately for Dunsandel, which in a contested process could wipe out all Synlait’s debt leaving shareholders with a free carry from the other assets which could be sold in a more considered fashion.
Today virtually all A2′s infant formula continues to be manufactured by Synlait at Dunsandel and the Chinese regulations mean it probably always will be.
Synlait has, without doubt gotten itself into serious financial strife. The market chatter is that the equity capital raise will be somewhere north of $200m.
Given Bright’s recent actions to inject $130m, its logical next move would be to push to take control through a simple placement. A2, strategically and for its own survival, will have to be part of that conversation.
Given the huge dilution effect, a shareholder vote will be required and an independent appraisal report produced. The minority shareholders will then get to decide.
It will be interesting to see how the independent directors approach this. Only one, George Adams, has listed company experience.
A win for Bright and A2, will likely be a bottom drawer disaster for all the long suffering retail and institutions.
Forsyth Barr analyst Matt Montgomerie said most indicators are pointing to a robust result when the company reports on Monday.
“Our mosaic of data points shows: (1) strong market share gains (supported by ongoing consolidation), particularly in the offline channel, and (2) solid brand health metrics,” Montgomerie said.
“While we think the 2024 result will be strong with risk to the upside compared to our forecasts and consensus (driven by China Label revenue and higher interest income), and 2025 should see ongoing strong earnings per share growth, to sustain the recent share price strength, there is little room for any material negative surprises relative to market expectations,” he said.
With 12-month forward price earnings ratio of 26 times, A2 is at the top-end of its relative valuation to consumer and dairy/infant formula peers, “albeit in-line with its own history,” Forsyth Barr noted.
Market expectations are for the company to report a net profit of about $172m for the June year from $155.6m a year earlier.
Former Spark chief executive Simon Moutter was appointed chairman of Kāinga Ora in May - a big job given the Government’s plans for it.
But his pay is likely to pale in comparison to what he is getting for sitting on the board of the Commonwealth Bank of Australia - Australia’s largest bank.
CBA’s annual report this week revealed Moutter got paid A$372,906 ($407,091) in the year to June 2024, up from A$355,810 ($388,427). On top of that he received NZ$50,000 for consulting services provided to CBA subsidiary ASB Banking Ltd Technology Advisory Group.
How much Moutter will get paid as chairman of KO won’t be known until its next annual report is released. But the prior chairman Vui Mark Gosche was paid $98,000 for the job.
Moutter is also chairman of three privately-owned companies - Smart Environmental Group, Les Mills International and Designer Wardrobe.
Kiwis are feeling downbeat about the local sharemarket but have growing confidence in overseas capital markets, research shows.
A survey of 500 small investors by Chartered Accountants ANZ found the percentage of investors with some or more confidence in domestic capital markets dropped from 77% to 73% and is down from 83% at the height of Covid in 2020.
In contrast, the percentage of investors with some or more confidence in overseas markets has climbed from 64% in 2020 to 81% in 2024.
“Across the board, confidence in domestic capital markets and publicly listed companies has fallen, while confidence in global capital markets outside has grown,” CA ANZ reporting and assurance leader Amir Ghandar said.
“The survey indicates that Kiwis perceive the rest of the world is doing much better in the fight against inflation, and that other global economies have broken through with rate cuts or positive central bank signals.
“The last four years have been a rollercoaster, so it’s not surprising that many investors think there’s greener pasture overseas. Whether that’s true or not, this sentiment impacts the volume, type and location of investment.”
Despite the pessimism, 53% of investors said they were likely to increase the scale of their investments in the next year – down just 3% from last year. Only 16% said they wouldn’t increase investment in that period.
When asked about what they have the most confidence in, investors said that term deposits, KiwiSaver, property and bank savings were top of their list, with shares in private companies and on the stockmarket further down, followed by crypto as a distant last.
-additional reporting Jamie Gray and Tamsyn Parker
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