Synlait Milk shares slump after earnings downgrade

Synlait Milk chairman Graeme Milne. Photo / File.

A2 Milk's key infant formula supplier, Synlait Milk, said it would not achieve previously advised earnings growth in the current year as a result of "significantly lower" infant powder base sales due to market consolidation in China.

Canterbury-based Synlait said its profit for the July 31 year would be between $70 million and $85m compared with last year's net profit of $82.2m, which was a 10 per cent improvement on the previous year's.

Synlait's previously announced earnings guidance was for its net profit to continue to grow in 2020, with the rate of profitability increasing "at least at a similar rate" to 2019 over 2018.

"Current information now indicates this rate of growth will not be achieved," the company said in a statement.

Soon after the market's opening, Synlait's share price fell by $1.20 or 14 per cent, to $7.09.

Synlait said had not felt the financial impact of the coronavirus outbreak in China but that it nevertheless posed a risk.

In a separate statement, Synlait's part-owner and major customer a2 Milk said its business performance remained strong.

Synlait said the latest earnings guidance was the result of:

• significantly lower than anticipated infant base powder sales due to China infant nutrition market consolidation, causing a reduction in demand from brand owners who are yet to receive brand registration;
• lactoferrin prices being more volatile than previously anticipated; and
• Synlait still anticipated growth in consumer-packaged infant formula sales volumes over the full year, but the growth was not as strong as first thought.

"The a2 Milk Company's contribution to this growth has not changed," it said.

In an update for the first-half result, due out on March 19, Synlait now expects its net profit to be in a range of $26.5m to $28.5m for the six months ended January 31, 2020, down from $37.3m a year earlier.

The half-year result would be impacted by:
• increased incremental interest, manufacturing and costs associated with the Pokeno and advanced liquid dairy packaging facilities;
• lower sales volumes of ingredient products than anticipated due to sales phasing and product mix impacts; and
•lower sales of infant base powders due to the China infant nutrition market consolidation.

"Naturally, the Synlait team expected a stronger full-year 2020 financial performance," chairman Graeme Milne said.

"We remain confident that the decision to focus on our medium to long-term strategic opportunities will over time improve shareholder value and the sustainability of our business," he said.

The spread of coronavirus and the risk it posed to Synlait's business was being carefully monitored.

Globally there was uncertainty about coronavirus' impact on supply chains and consumer demand.

"Therefore, while Synlait can confirm there has been no material short-term impact on its financial performance in connection with the coronavirus outbreak, it represents some downside risk going forward," Milne said.

The outbreak was considered as part of the broader outlook update and contributed to Synlait's decision to issue a wider guidance range.

"We are not currently experiencing any supply chain disruption; however, we are monitoring the situation very closely and felt it prudent to front foot potential impacts," Milne said.