Synlait shares hit record on profit gain, sees further growth, branded products

Synlait posted an 11 per cent gain in full-year profit and flagged further growth.

Synlait Milk shares rose to a record high after the company posted an 11 per cent gain in full-year profit and flagged further growth this year while signalling a move into branded consumer goods.

Net profit rose to $38 million in the 12 months ended July 31 from $34.4m a year earlier, the Dunsandel-based milk processor said today. Revenue climbed 39 per cent to $759m while cost of sales rose 45 per cent to $649m.

Chief executive John Penno says he expects to see "a strong increase in profit year on year" as Synlait reaps the benefits of its investment in expanded production and a move into new products. The business-to-business dairy products manufacturer is looking to enter the market for branded consumer products for the first time, although Penno is coy about the details.

"Up until now we've been strictly B2B, which has been very important during start-up," Penno said on a conference call. It would move into branded products "where no conflict exists with existing partnerships" which meant it was "unlikely to be in infant formula", where companies such as A2 have very strong brands. "We do see areas in new categories that could be Synlait branded."

Synlait shares rose 4.2 per cent to $5.47, having touched an all-time high of $5.50 earlier today. The stock has gained 76 per cent this year, second only on the S&P/NZX 50 Index to its infant formula partner A2 Milk, which has soared 178 per cent and rose 1.5 per cent to $5.93 today.

Profit beat the $36.4m forecast of brokerage Craigs Investment Partners, which had a forecast 2018 NPAT of $60m, although that may be revised after the results today.

"It's a decent result from the key headlines," said Mark Lister, head of private wealth research at Craigs. "Net debt was down, that's a good thing, and cash flow looked pretty strong as well. It looks like a reasonably solid finish to the financial year."

Synlait raised almost $100m in new capital during the financial year to repay debt and fund its growth, including the purchase of a milk powder canning plant in Auckland capable of blending and packaging infant formula and an expansion of its wetmix facility at its Dunsandel site. Sales and distribution costs and wages rose in the year while finance costs fell as net debt tumbled to $83m from $214m.

"The past year has been one of consolidation ahead of an expected period of solid earnings growth," Penno said in a statement. "Over the past year, increased revenue has been achieved through volume growth and growth in our high-value infant category. Increased gross profit has been invested to build capability and capacity ahead of an expected acceleration of our infant formula business, and preparing to launch into new high returning dairy categories."

Last month it announced plans to triple sales of infant formula to Sichuan-based New Hope Nutritionals, which is already its second-largest customer for finished infant formula and its largest under a Chinese label. Synlait took a 25 per cent stake in New Hope in 2015 and is itself 39 per cent owned by China's Bright Dairy.

Gross profit per metric tonne fell to $781 from $863 a year earlier while the volume of sales climbed to 141,393 tonnes from 116,402 tonnes. A breakdown by category shows gross profit for powders and cream fell 12 per cent to $688 a tonne, while consumer packaged gross profit rose 8.9 per cent to $723 a tonne. Specialty ingredients gross profit was $16,904 a tonne, a turnaround from a loss of $14,647 a tonne a year earlier.

Chief financial officer Nigel Greenwood said the decline in gross profit was driven by higher growth in ingredient sales, which diluted gross profit per tonne, "as well as weaker margins within our ingredients sub-category". The decline in gross profit per tonne for powders and cream was "due to tougher trading conditions for ingredient products."

Increased milk production and the sale of 3,939 tonnes of carry-over impaired inventory from 2016 "at little or no margin" diluted margin per tonne, he said. In addition, ingredient sales volumes grew 22 per cent, outpacing a 17 per cent increase for infant sales volumes, which also diluted margin per tonne.

Synlait affirmed its forecast milk price of $6.50 per kilogram of milk solids for the 2017/18 dairy season, up from $6.30/kgMS in 2016/17. It has about 200 farmer-suppliers, including 60 farms supplying 225 million litres a year of a2 milk.

No dividends were declared.