SML - Synlait Milk Ltd

[sb9]

Conf call is being hosted by CEO and CFO from their brand new office in Shangai, where they had their board meeting too y'day.

[sb9]

Just imagine the margin is cut by half? Lactoferrin had in the past quite erratic price jumps (in both directions). Nice if they can make money with it as long as the sun is shining, but no guarantees they will in the future - it is a quite speculative product.

They've doubled that facility this year, guess they would've done their homework on movement in margins.

[BlackPeter]

They've doubled that facility this year, guess they would've done their homework on movement in margins.

Very hard to predict. Remember when they first started the Lactoferrin business (presumably doing their homework and hopefully better than in Pokeno) and the year after finishing the facility the margins have been in the cellar?

Its like trying to predict next years weather ...

[RTM]

Just because they've made a reasonable offer, doesn't mean the covenant holder has to accept it. Given all that's gone on I expect he's holding out for an obscenely unreasonable offer.

No….they don't have to accept it. And I guess that's where the courts come in to make a judgement.
I guess SYNLAIT have far better legal advice than all of us, plus knowledge of how the negotiations are going to date ....so I imagine that is why they are so sure of their ground.
Nevertheless....pleased I bailed at $10.00.

[BlackPeter]

No….they don't have to accept it. And I guess that's where the courts come in to make a judgement.
I guess SYNLAIT have far better legal advice than all of us, plus knowledge of how the negotiations are going to date ....so I imagine that is why they are so sure of their ground.
Nevertheless....pleased I bailed at $10.00.

Hmm - lets face it - if they would have had and listened to good legal advice than they never would have built the factory without resolving this issue beforehand. They would have been in a much much better negotiating position then and could have walked away easily without risking to set several $100 millions into the sand.

I can't comment on their legal advise, but if they listen it is not good and if it is good they don't seem to listen.

[Beagle]

Today's results (read here....pretty impressive 10% increase in Net profit) provide an update on Pokeno....

"We acknowledge this issue has created uncertainty for shareholders and milk suppliers but are committed to ensuring a reasonable outcome is reached. Synlait has made a reasonable settlement offer and we are working towards one of two outcomes which we believe are in the best interests of all, a reasonable settlement offer, or a court outcome. (Hearing set for Supreme Court 21 Oct 19)

We are comfortable that our legal exposure is not substantial. Synlait determined, and the auditors agreed, that no provision is required under the accounting standards in its financial statements."

So the accountants with no formal legal training are now QC lawyers...Hmmmm.
10% profit growth is very weak given ATM's volume growth and well below analyst consensus average.
I agree with others above that the aggrieved party is going to hang out for an obscenely unreasonable amount of compensation and that Synlait's own arrogance of taking a gung-ho approach of building this facility in full knowledge that the matter was going to be vigorously appealed amounts to gross recklessness and will probably result in the company shooting itself in the foot, possibly both feet.

None of this matters of course because no doubt shareholders are far more impressed that this company continues with great pride to take great strides with its inclusiveness policy and carbon reduction program.

[BlackPeter]

Just looking into the balance sheet. Liabilities to total assets up again to 57.1%. They better hope the Pokeno settlement will be really cheap and interest rates stay low.

On the other hand - high debts (i.e. low equity) are good for the ROE factor, but still - while 16.7% is a not too bad return, didn't they mention they try to achieve 20%? Lets hope that they don't try to do that by further increasing the debt ...

[Beagle]

Yeap...all recent expansion has been done on massively expanding bank debt and a what could possibly go wrong approach has been taken.
They're really in a very weak position if the worst happens and they have to relocate that Pokeno facility.
But no worries...just hit shareholders up for a massive rights issue, why shouldn't shareholders trust them completely with more capital are their "exemplary" track record of "careful" risk management.

I think ATM might end up owning this at considerably below the current share price if things go badly wrong.

[Leftfield]

........I think ATM might end up owning this at considerably below the current share price if things go badly wrong.

Crikey next thing we know ATM will be asked to buy out both SML and Fonterra!

(FWIW - I prefer ATM's 'capital light' approach.)

[BlackPeter]

I was wondering why they say that they don't expect a substantial settlement for Pokeno "We are comfortable that our legal exposure is not substantial" and dived into the financial notes. Took me a while to find the relevant passage (on page 104 ... ) and surprise - they say they don't really know:

21 CONTINGENCIES
The Group is currently involved in a dispute regarding restrictive covenants attached to land it purchased in Pokeno. In February 2018, the Group announced the conditional purchase of 28 hectares of land in Pokeno to establish its second nutritional powder manufacturing site. The land was subject to restrictive covenants limiting the development of the land that the vendor was required to remove. The vendor applied to the High Court to have the restrictive covenants removed. In November 2018, the High Court removed the restrictive covenants. The High Court also declined to award compensation to the covenant holder on the basis that they would not suffer any loss due to the extinguishment of the covenants as they were of little practical value. The Group took legal title to the land following the High Court’s decision. The covenant holder appealed to the Court of Appeal which in May 2019 overturned the High Court’s decision.

In June 2019, the Group filed an application for leave to appeal to the Supreme Court to have the Court of Appeal’s decision overturned. In August 2019, the Supreme Court advised that there will be an oral hearing prior to a decision on whether the Group will be granted leave to appeal. The oral hearing is set for 21 October 2019.
There are a range of possible outcomes for the Group including a negotiated settlement between the parties. Given the range of possible outcomes the Group is not able to reliably estimate any potential liability.
No other significant contingent liabilities are outstanding at balance date (2018: $nil).

Given that they are not able to estimate any potential liability - it could be a big number as well - couldn't it?