Synlait Story Seems to Have Curdled

Things seem to be getting increasingly fraught at NZ dairy processor, Synlait.

The weak sales impacting a2Milk in China were felt in Synlait’s half year results,  which told investors on Monday it continues to wrestle with significant uncertainty and volatility in its business.

a2Milk said in its recent half year results that sales into China continue to be hit by the downturn in global travel triggered by the border lockdowns due to Covid.

This continues to hit a2M’s sales of infant formula into China especially hard, with a consequent major knock-on impact on Synlait and especially its profit margins.

Shipping problems and costs (the latest being the blocking of the Suez Canal) and rising global dairy prices are also having an adverse impact on the company’s profit margins.

In fact so tough are these conditions that Synlait is forecasting its full year result for the year to the end of July 2021, will be a “broadly break-even” after the first half saw a 70% slump in earnings.

That prospect has seen the company engage in talks with its banks to ensure financing remains in place.

While revenue for the six months to the end of January rose 19% to $NZ664.2 million ($A608 million), earnings plunged 76% to a tiny $NZ6.4 million ($5.86 million).

The cause was the drop in demand from a2 Milk, which is experiencing a decline in sales due to weaker demand out of China.

Synlait is a major producer of infant formula base, which is a hot product for Chinese resellers known as ‘daigous’ who are mostly Chinese tourists who come to Australia, order products (such as infant formula and other milk products, vitamins etc) and then ship them back to China for sale into that country’s various retail channels.

Listed vitamins group, Blackmores is another feeling the pinch from the collapse in the daigou sales channel because inbound tourism has been all but blocked by the impact of the pandemic in closing Australia’s international borders.

“We cannot control COVID-19 but we can control our response. Our focus is now to mitigate the impact COVID-19 has had on our customers, as we manage costs and capacity and pull forward value creation initiatives to accelerate the execution of our strategy,” Synlait CEO Leon Clement said on Monday.

“We will need time to get through this, but we remain confident about our future. Our investment phase is complete. We have the capacity, capability, and customer base to generate significant value. COVID-19 hit us late, but we will emerge from the pandemic a stronger, more sustainable Synlait.”

Synlait said it is continuing to experience significant uncertainty and volatility within its business due to:

  • “Ongoing uncertainty in The a2 Milk Company’s expected demand for the remainder of FY21 and FY22. Synlait does not currently have sufficient confidence to forecast when this recovery will occur.
  • “The resulting impact of this on Synlait’s business is two-fold: demand for consumer-packaged infant formula remains uncertain, which in turn impacts forward infant base powder production and asset use.
  • “Synlait’s ingredients business. The sudden drop in consumer-packaged infant formula demand, combined with rapidly rising Global Dairy Trade prices, foreign exchange, and a changing product mix, creates volatility which limits returns.
  • “Our expectation is that global shipping delays will continue and further impact the FY21 result.
  • “Board and management have considered the above factors and how they will impact Synlait’s FY21 profitability. There is still a range of scenarios contributing to the company’s profitability, and our current outlook suggests a broadly breakeven FY21 NPAT result.
  • “While all banking covenant ratios were met during HY21, Synlait has proactively engaged with its banking syndicate to increase its leverage ratios to manage any risk at the end of FY21.

“The company’s FY21 business plan is fully funded by its current banking syndicate,” Monday’s statement said.

The poor news saw the shares fall 4.6% to $3.12. The shares hit a 12-month low of $3.06 in trading on Monday and are well down from the $4.93 2021 high at the start of January.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →