SML - Synlait Milk Ltd

[randoman]

There is a view, with which I don't entirely agree, that 30% is effective control. I wouldn't be entirely sanguine about "probably 40%" if that is in fact what Bright will reduce to. I am very conscious I risk being acused of sino phobia and would be pleased if anyone could provide any examples of Chinese NZ long term investment for the continuing prosperity of all shareholders. If you throw Fonterra ( NZ infant formulas quality again a live issue) and Zespri scandels into the mix,the investment future tends more to the highly speculative than than conservative!
http://www.odt.co.nz/news/national/2...bad-news-china

Whilst I can't really comment on the Chinese long/short-term investment and their motivations regarding shareholders, I do agree with general comments I've read in the past that the Chinese are very keen to secure protein sources.

[1leon]

Originally Posted by FarmerHamilton
Bright have indicated they will not participate in the IPO so their current 51% stake will be diluted down to probably near 40% so I am assuming they are happy long term investors, I would guess they have an off take agreement which guarantees them a certain tonnage of product at market prices each season. They will also go from having board control to just a representation. If the IPO is big enough to get them in the NZX50 then tracker finds will need to buy and you'd have to think they will be on the radar of the big AgriFunds around the world .
There is a view, with which I don't entirely agree, that 30% is effective control. I wouldn't be entirely sanguine about "probably 40%" if that is in fact what Bright will reduce to. I am very conscious I risk being acused of sino phobia and would be pleased if anyone could provide any examples of Chinese NZ long term investment for the continuing prosperity of all shareholders. If you throw Fonterra ( NZ infant formulas quality again a live issue) and Zespri scandels into the mix,the investment future tends more to the highly speculative than than conservative!
http://www.odt.co.nz/news/national/2...bad-news-china

Curiously notwithstanding diluting to 38-41% Bright have obtained an exemption in the IPO to retain control board control as well.It will be fascinating to see how the bookbuild allows for "control" in assessing the share price.

[Xerof]

A few comments from reading the prospectus:

Bright have taken no chances with 'control', refusing to approve the IPO, unless the governance issue was pre-approved. Fair enough, they say it's to do with accounting issues - not sure I am prepared to take that statement at face value.

Following the money, we are seeing 45m returned to some of the foundation shareholders, and debt repaid to the Banks. Countering that, there is an escrow agreement for about 18 months.

I disagree with Farmerhamiltons comments re FX gains going to the bottom line - if you read between the lines on their Treasury management policy, they 'need' to at least match the Fonterra pricing model inputs to be able to compete on farm gate pricing. In short, it's what their chairman would call Americas cup matchracing - taking a different tack with the wrong windshift can lose you the race. So, they will very much stick to the hedging model of their major competition, and that means any FX improvements will form part of a higher gate price, ceteris paribus. The past couple of years they have been a little behind in this regard. Bottom line improvements will come from a higher proportion of inputs going to the high value outputs, with the proviso that the costs incurred to produce those products make it more profitable to do so.

They have experienced some volatility on the bottom line recently, and the forecasts look ambitious. Everything will need to go to plan....

I think I will participate, but with eyes open.

Interested in some comments from the more analytic contributors....

[bottlerboy]

The details regarding Bright Directors are in the following excerpt from the NBR online article

Bright Dairy's shares would be unchanged at 57.2 million, while the Synlait Ltd shareholders reduce to 36 million. Total shares on issue jump to between 140.6 million and 148.8 million from 112.3 million currently. The actual split will depend on how many shares the Synlait Ltd investors sell.
Synlait Milk has sought NZX waivers for what it calls "non-standard governance arrangements" relating to Bright Dairy, which would allow the Chinese company to appoint four of a maximum eight directors. Bright's appointees will not be required to retire by rotation and have a majority of votes.
The arrangements apply as long as Bright Dairy's stake remains between 37 percent and 50 percent.
Mr Penno says the arrangements are to allow Bright Dairy to continue to consolidate Synlait Milk into its own financial statements as it can with the current 51 percent holding.

[Xerof]

Yep, thats the statement they want us to take at face value

[noodles]

Nice to read a prospectus where the company makes a profit. Looks expensive on fy13 earnings, but much better on fy14.

So it really depends on how confident you are in the forecasts.

Way cheaper then a2.

http://www.synlait.com/site/uploads/...-From-Milk.pdf

[1leon]

Yep, thats the statement they want us to take at face value

Yeah right! Bright with a share cap of $3.6 billion needs to equity account a minnow a tenth of its value! And future IPOs should meet Chinese Accounting requirements?

[Lease]

Synlait Milk Limited-a Brilliant Star

1. Growth

The Company sales have grown every year from 2008 onwards. In the last four financial years, sales growth rate is on average at 44%, which is mainly driven by annual volume production growth by 30%.

2. Profitability

As a fast growing Company, Synlait Milk Limited did not make profit from 2008 to 2011 due to relatively low gross profit margin(GPM). The Company started to make profit from 2012 as GPM was improved significantly. The interim report of 2013 financial year has indicated GPM has substantially improved. I can reasonably foresee 2012 is a cornerstone for Synlait Milk as from that year forward, the Company profit will go up year by year.(2013 half year profit has already exceeded the one of full year of 2012).

3. Financial Health

After IPO, interest cover ratio is at 3.01 in 2013 and 9.23 in 2014. Financial leverage(Total Assets/Equity) is at around 2.05-2.10, which is fairly conservative. Long-Term Debt/Equity is almost Nil. Put all together, the company is financially health.

4. Bear Case

The Company may suffer if foreign countries put trading barriers to New Zealand dairy products as the Company's products are mainly exported. For example, Recently, the Chinese Ministry of Industry & Information Technology made some important new announcements with respect to new and intended regulations for the infant formula industry. I personally don't think the Chinese regulations will have negative effects on Synlait Milk as its single largest shareholder is Bright Dairy Holding Limited, but unsure if Synlait Milk can cope with any vicious competition in China and any other emerging markets.

5. Management

Most senior managers have vast work experience in dairy industry. Quite a few of them used to work in Fonterra. Some of them also have extensive international work experience. from the results the Company have achieved so far. I think the management is trustful.

6. Valuation

At indicative IPO price of $2.05, forward PE is 28 in 2013 and 15 in 2014. If IPO price is at $2.65, forward PE is 34 in 2013 and 19 in 2014. It is much cheaper than another dairy Company listed at NZX-A2 Corporation.

Overall, it is a fantastic company with endless growth potential. It will certainly be a star at New Zealand Stock Exchange in 2013.

[1leon]

Synlait Milk Limited-a Brilliant Star

1. Growth

The Company sales have grown every year from 2008 onwards. In the last four financial years, sales growth rate is on average at 44%, which is mainly driven by annual volume production growth by 30%.

2. Profitability

As a fast growing Company, Synlait Milk Limited did not make profit from 2008 to 2011 due to relatively low gross profit margin(GPM). The Company started to make profit from 2012 as GPM was improved significantly. The interim report of 2013 financial year has indicated GPM has substantially improved. I can reasonably foresee 2012 is a cornerstone for Synlait Milk as from that year forward, the Company profit will go up year by year.(2013 half year profit has already exceeded the one of full year of 2012).

3. Financial Health

After IPO, interest cover ratio is at 3.01 in 2013 and 9.23 in 2014. Financial leverage(Total Assets/Equity) is at around 2.05-2.10, which is fairly conservative. Long-Term Debt/Equity is almost Nil. Put all together, the company is financially health.

4. Bear Case

The Company may suffer if foreign countries put trading barriers to New Zealand dairy products as the Company's products are mainly exported. For example, Recently, the Chinese Ministry of Industry & Information Technology made some important new announcements with respect to new and intended regulations for the infant formula industry. I personally don't think the Chinese regulations will have negative effects on Synlait Milk as its single largest shareholder is Bright Dairy Holding Limited, but unsure if Synlait Milk can cope with any vicious competition in China and any other emerging markets.

5. Management

Most senior managers have vast work experience in dairy industry. Quite a few of them used to work in Fonterra. Some of them also have extensive international work experience. from the results the Company have achieved so far. I think the management is trustful.

6. Valuation

At indicative IPO price of $2.05, forward PE is 28 in 2013 and 15 in 2014. If IPO price is at $2.65, forward PE is 34 in 2013 and 19 in 2014. It is much cheaper than another dairy Company listed at NZX-A2 Corporation.

Overall, it is a fantastic company with endless growth potential. It will certainly be a star at New Zealand Stock Exchange in 2013.

And its got Ruth Richardson on board! Now why didn't you mention that?

[Lease]

And its got Ruth Richardson on board! Now why didn't you mention that?

I didn't name any senior managers just generally consider the team is great!