New Zealand's fourth-largest milk processor, Synlait Milk ((SM1)), has had a strong run up in its shares on the strength of its relationship with a2 Milk ((A2M)). The company is the exclusive supplier of infant formula to a2 Milk for that company's product base in China and Australasia.
The company has announced a conditional purchase of Dairyworks for NZ$112m. Dairyworks is one of the larger dairy companies in New Zealand and supplies around 50% of cheese and 25% of butter under its consumer brands.
UBS initiates coverage with a Neutral rating and NZ$9.70 target, believing the downside is priced into the stock. The broker's analysis suggests 60% of the company's profit comes from manufacturing infant milk formula, mainly for a2 Milk ((A2M)) under contract until FY24.
Synlait Milk is nearing completion of the second major capital expenditure phase, during which it will invest NZ$400m in four major growth projects. Morgans believes the new investment will drive strong volume-led earnings growth over FY19-21.