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Update: Synlait shares fall 12% on first-half loss; lower guidance

30 Mar 2015

Shares of Synlait Milk, which has taken a cornerstone stake in Sichuan New Hope Nutritional Foods Co to gain direct interest in a Chinese infant formula brand, fell as much as 12 percent after the dairy company turned in a first-half loss and cut the outlook for its full-year profit.

The Rakaia-based company posted a loss of $6.4 million in the six months ended Jan. 31, from a profit of $12.1 million a year earlier, it said in a statement. Sales sank 31 percent to $197.5 million. The company had a one-time product mix benefit of $7.5 million in the first half of last year. It won't pay a first-half dividend.

The shares fell as much 36 cents to $2.65, the lowest level since August 2013, and recently traded at $2.76.

Synlait cut its expectation for full-year net profit to be between $10 million and $15 million, a forecast below last year's $19.6 million annual net profit, itself affected by two guidance cuts, which cited volatile conditions in the dairy industry.

"The past 18 months have been challenging for everyone in the dairy industry," chairman Graeme Milne and chief executive John Penno said in Synlait's interim report. "While we are expecting a much stronger performance in the second half of the 2015 financial year, associated with increased sales of our higher margin infant formula and nutraceutical products, we expect the current market volatility to continue."

Last year, exports to China were delayed as Synlait waited for a licence under a new Chinese regulatory system, which makes dairy manufacturers take responsibility for branded products sold to consumers, meaning only a quarter of forecast sales volume for bulk infant formula and retail-ready infant formula had been delivered to date.

Meanwhile, global dairy product prices more than halved last year, as an oversupply in the market weighed on demand. Synlait is looking to insulate itself against volatility in the commodity market by producing value-added products, but said it had challenges in the production of its new lactoferrin protein, which may see the forecast 15 metric tonnes not produced in the full year.

"In theory, a fall in the milk price should be helpful because obviously that's an input," said Matthew Goodson, managing director at Salt Funds Management, which doesn't hold the stock. "But a fall in the milk price doesn't occur in isolation. It's occurring because demand is changing for all this great variety of end products that there are in the market."

c first-half results come after Fonterra Cooperative Group, the world's largest dairy exporter, last week posted a 16 percent drop in first-half profit to $183 million in the six months to Jan. 31, which it said reflected tough trading conditions. Sales declined 14 percent to $9.7 billion. Units of Fonterra Shareholders' Fund, which give holders access to the cooperative's dividend stream, fell to a record low in the days after the announcement.

Fonterra confirmed its forecast payout for the current season of $4.70 kg/MS, down from a record $8.40 kg/MS last season, with guidance for dividends trimmed to a range of 20 cents to 30 cents, from a previous 25 cents to 35 cents. Synlait also lowered its forecast payout to $4.40 per kilogram of milk solids from a previous forecast of $5.00/kgMS.

"You'd have to say the dairy industry is one which historically has had very little listed representation," Goodson said. "With both the Fonterra and Synlait numbers in the last few days, the gloss is coming off it. The performance from the two listed entities to date has not been good."

Negative cashflow jumped dramatically in the half, totalling $62.6 million, compared with $8.0 million for the same period last year. The change was attributed to falling milk prices and payouts to dairy farmers.

"Given the size of the downgrades, some folk will start to turn to Synlait's balance sheet," Goodson said. "They've committed to a triple B shadow credit rating but just what that means in the context of where they currently are, we will just have to see."

The stock is rated an average of 'hold' based on the opinion of two analysts surveyed by Reuters, with a price target of $3.80.

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