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Synlait cuts market milk price to $4.40/kgMS, ups capital spend

Synlait Milk, the listed dairy processor, has today cut its forecast market milk price for the 2014/2015 season along with a corresponding decrease in advance rates to farmers due to depressed global dairy prices.

The Canterbury-based company lowered its forecast payout to $4.40 per kilogram of milk solids from a previous forecast of $5.00/kgMS, it said in a statement. The move follows dairy exporter Fonterra Cooperative Group revising its forecast farmgate milk price down 60c to $4.70/kgMS in December.

In an investor presentation today, Synlait said low commodity prices have persisted as the global market struggles with a current oversupply of milk products, due to supply growth from major exporters at its strongest in eight years, competitor pressures from Europe due to weak local currency and the Russian trade embargo, and China still working through high inventory levels.

Synlait chairman Graeme Milne said he remains confident of its previous guidance around our 2015 financial year performance, although there is no doubt that the world continues to be a volatile place.

The company revised its profit forecast in May to a range of $17.5 million to $22.5 million, from an earlier forecast of $25 million to $30 million. It said the dry weather was likely to have only minimal impact on its supply base at this stage, with most of its suppliers having irrigated farms.

"At the end of this financial year we will see the benefit of increased infant formula and nutritional sales, but this will be largely offset by increased operating and funding costs. We expect the majority of our higher value product sales to take place in the second half of FY2015, which will therefore be reflected in our full year results. As a consequence of this timing difference our interim results will be substantially lower than the previous corresponding period," Milne said.

Synlait managing director John Penno said the over-supply in the global dairy market is unlikely to change in the short term, however he expects prices to strengthen in the medium term as supply and demand rebalances.

"Critical to this rebalancing is how quickly dairy farmers around the world respond to lower milk prices and when the volume of whole milk powder sales return to previous levels," said Penno.

The company, which counts China's Bright Dairy & Food as a cornerstone shareholder, said it expects a modest recovery of prices in the short term for whole milk powder of UD$2,700 per metric tonne compared to other market forecasts of US$3,500/tonne by July 2015. It expects China to pick up later this year when excess stocks have been worked through.

"While our revised forecast market milk price reflects our current view of where this season will end up, we are aware that conditions could change and as a result we expect to update our forecast market milk price towards the end of May 2015," Penno said.

Synlait said early season strong milk flows will result in overall milk supplied for the season exceeding original budget and it was on target for milk supply requirements for the 2016 season. The introduction of Fonterra's MyMilk programme had not yet have any material impact on its ability to secure its milk requirements, it said.

In an update on its capital projects, Synlait said it is now looking to increase contracted milk supply for the 2016 financial year in excess of the targets that supported the build of a third $135 million larger dryer. It is increasing the size of the plant and capability due to customer demand to 10.5 tonnes per hour, a 25 percent increase in volume capacity.

It has bank approval for an increased loan for the plant, and it said net debt overall is still comfortably within its banking covenants. It has $239.1 million worth of capital projects planned over the next couple of years, of which $68.1 million have been completed.

The scope of the blending and consumer packaging facility commissioned in July has been increased from 18,000 tonnes per annum as stated in the prospectus to potentially as much as 30,000 tonnes per annum. It is also forecasting to have around 6,000 tonnes of canned infant milk formula in the first year of operation compared to the 4,400 tonnes stated in the original business case.

A decision on a planned $15 million butter plant has been deferred to 2016 to keep capital spend down this financial year.

Synlait shares fell 2.7 percent to $3.31, and are down 9 percent on the year.