Synlait Milk’s latest earnings downgrade has highlighted the relationship with its 20 per cent owner and biggest customer, a2 Milk.
Synlait, a milk processor and infant formula maker, now says its 2023 annual result could
A2 Milk is Synlait’s biggest customer, while Synlait is a2′s sole supplier of infant formula. Photo / 123RF
Synlait Milk’s latest earnings downgrade has highlighted the relationship with its 20 per cent owner and biggest customer, a2 Milk.
Synlait, a milk processor and infant formula maker, now says its 2023 annual result could range from a net loss of $5 million to a net profit of $5m.
There had been further reductions in demand for advanced nutrition products, “mostly from one of Synlait’s customers” (a2 Milk), which were expected to have a net profit impact of about $16.5m in 2023. The rest of the impact on net profit after tax (about $3.5m) was attributable to factors including higher financing and supply chain costs.
A2 Milk is Synlait’s biggest customer, while Synlait is a2′s sole supplier of infant formula, yet the senior partner of the two was less downbeat on the outlook.
In response to Synlait’s update, a2 Milk said that it was “surprised at the extent of the reduction in Synlait’s guidance range”.
“Taking all of the above factors noted by the company into account, a2 Milk confirms that there is no material change to its 2023 outlook as confirmed at the time of the announcement of its first half 2023 results on 20 February 2023,” it said.
A2 maintained its 2023 revenue guidance of low-double-digit percentage growth on 2022, but noted that English-label infant formula revenue was now expected to be down to the mid-single-digits, partially offset by continued strong double-digit growth in revenue from China-label infant formula.
Both companies are eagerly awaiting the outcome of China’s State Administration for Market Regulation (SAMR) re-registration process for their infant formula.
The on-site audit process is complete and Synlait still expects to receive re-registration and commence production in the fourth quarter of 2023, subject to SAMR approval.
Synlait’s outlook is at odds with a2′s, even though the two are ostensibly joined at the hip.
Synlait’s guidance has depressed its own share price, while A2 Milk’s share price looks to have weakened by association.
For a2 shareholders, a sub-$6 share price will be a disappointment given the well-cashed-up company’s decision last year to conduct a share buyback rather than return capital to shareholders.
On completion in March, a2 had spent $149m on the buyback at an average price of $6.87 - compared with $5.70 today.
Devon Funds’ head of retail Greg Smith says the two players are strangely at odds, given their very close ties.
“The two are reliant on each other and the curious thing about these tit-for-tat announcements was that both had quite a divergent view on the outlook,” he said.
“You would have thought that they would have been on the same page.
“Synlait was more grim than a2, but the thing that they seemed to agree on was that [China] SAMR registration was vitally important for both companies and that it is on track, so you wonder what has been lost in translation.”
Looking ahead, Synlait shareholders will want to see their company diversify its client base by more than just going from one big customer to two, which will happen once an as-yet-unnamed customer comes on stream.
Smith says there is an acceptance there that the companies’ fortunes are closely tied.
“Synlait is trying to diversify the situation but it’s not going to happen overnight and they are very much closely tied to infant formula, in particular in China. What’s good for one is good for the other.
“‘The reality is that they are going to be very closely tied for the foreseeable future.
“A2 is the marketing side, so perhaps they are more inclined to see things in a more positive light.
“Maybe it’s a case of Synlait calling it as it is seeing it.”
Oyvinn Rimer, senior research analyst at Harbour Asset Management, said he did not expect to see a change in the symbiotic relationship any time soon.
He said a2 Milk’s response to Synlait’s downgrade, via an NZX announcement, was “surprisingly emotive”.
“In the short to medium term, there is very little either of them can do to de-emphasise their relationship.”
He said it looked as though SAMR re-registration was taking longer than expected, which was causing both parties a bit of grief.
“At the end of the day, they have to work together to the best of their ability and on getting that registration across the line.
“There is nothing to suggest a separation, or even perhaps a2 taking a more meaningful stake in Synlait,” he said.
“I don’t think either scenario is going to play out in the short term.”
Synlait’s situation worsened over a short time.
Covid-19 has cast a long shadow over the company, but chief executive Grant Watson told the Herald in February that a recovery was well underway.
A month later, Synlait released 2023 net profit guidance of $15m to $25m - well short of market expectations - saying its previously advised two-year recovery plan would now take three years.
Then came last week’s downgrade, ranging from an annual $5m loss to a $5m profit.
The downgrades have driven Synlait’s share price down to $1.57 - less than half of last December’s high of $3.77.
Synlait’s NZX-traded bonds have been quoted at a yield of 11.25 per cent - the highest yield of any of the NZX-listed debt instruments.
The company, in its update, said it continues to actively engage with its banking syndicate, “which remains strongly supportive”.
Amendments to certain banking covenants for the remainder of 2023 have been approved, it said.
Rimer says Synlait’s downgrades demonstrate how swiftly things can change.
“It shows you how huge the operating leverage is in Synlait, with such a huge capital base.
“You don’t need much top-line softness before it has a massive impact on earnings, and I guess that’s what has happened here.”
Mānuka honey exporter Comvita is maintaining its guidance of double-digit growth in earnings before interest, tax, depreciation and amortisation despite the extreme weather that hit New Zealand this year.
It also reported strong demand forecasts from its markets.
Forsyth Barr said the key positives in the update included expectations of record sales in the fourth quarter and strong initial forecasts for the first quarter of 2024.
Comvita’s apiary division had reached break-even, providing further evidence for the harvest model’s effectiveness.
“The key surprise in the update was a forecast 2023 year-end [June] net debt position of $50m, which is materially higher than we expected,” the broker said.
Comvita’s management still expects full-year 2023 inventory to be in line with the prior year.
Shares in Hallenstein Glasson have been firm on speculation that it may soon supplant takeover target PushPay on the S&P/NZX50 index.
The clothing retailer’s latest update, issued in February, said the trading environment for the first eight weeks of the winter season had been challenging, with the cost of living and inflationary pressures affecting consumers’ discretionary spending.
However, group sales for the first eight weeks of the winter season were 13.9 per cent ahead of the same period last year.
Pushpay, the donation software company, is in the process is being taken over by Pegasus Bidco and its last day of trading is expected to be May 10.
Kiwibank has launched an offer of up to $200 million of unsecured subordinated notes.
The offer will raise Tier 2 capital to help Kiwibank meet its regulatory capital requirements and manage its capital position.
Kiwibank, New Zealand’s biggest locally-owned bank, has about 7.1 per cent of the mortgage market.
The bank is wholly owned by Kiwi Group Capital Limited, which in turn is owned by the New Zealand Government.
The notes are not guaranteed by any member of Kiwibank Banking Group, nor the Government.
Auckland International Airport is also considering an offer of fixed-rate bonds, maturing in November 2028, to New Zealand retail investors and to institutional investors.
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