SML - Synlait Milk Ltd

[silverblizzard888]

Great article on Stuff's that highlights a few things not particularly disclosed by Synlait. https://www.stuff.co.nz/business/far...rove-this-year

-New customer is Abbott (as mentioned above): "Synlait started producing plant-based advanced nutrition products in the last quarter of its financial year for a new customer, Abbott, the biggest supplier of infant formula powder in the United States." This will be a massive contract as abbott sells between $1-$2 billion worth of infant formula internationally, though they do have a plant in Ireland and they are now resuming production in the US after their infant formula recall. Could amount to hundreds of millions a year in business for Synlait over time.

-Dairyworks is profitable, so a sale should be likely given the decent numbers: "The Dairyworks business reported an after-tax profit of $9.8m on revenue of $282.8m, with total assets worth $177.9m. After liabilities, it had net assets of $117.3m."

Upcoming bonds to be refinanced, not bad yield at the moment of 18%: "Synlait has $180m of five-year bonds due for repayment in December next year, which it plans to refinance, in part or wholly, with bank debt." I assume the current lenders signaled that they would be interested in doing the refinancing.

[aperitif]

This is all getting very interesting….when you consider the strategic importance of Bright/a2/Synlait/Abbott’s assets.

Abbott having pulled out of the Chinese IF market have a factory located in Jiaxing. Let’s see what transpires over the coming few months

[Bikeguy]

This is all getting very interesting….when you consider the strategic importance of Bright/a2/Synlait/Abbott’s assets.

Abbott having pulled out of the Chinese IF market have a factory located in Jiaxing. Let’s see what transpires over the coming few months

Yes, I agree with you this is getting interesting, coming to the business end of some clear strategic planning from all parties involved.
My personal opinion is that A2 have recognised they are actually the weaker hand in these strategic plans, ( I am a holder of A2, and currently underwater so have no interest in seeing them fall further) so they are looking to diversify their current supply channel ( smart move for any business) in having at least 2 viable options for supply…however the key is in the licences and the IP to actually produce these products to the high standard required, hence Abbott coming to Synlait, a proven supplier whose NZ source (raw materials) and finished goods quality is world recognised, coupled with main shareholder Bright (market access)
Bright are not in the least silent partners and are very very astute at what they do, capital is no issue and production facilities that are of the quality of Synlait are extremely valuable and will be highly profitable over the long term.

[Bikeguy]

Synlait about to heat up on the back of some asset sales…

[silverblizzard888]

A lot to be excited about for Synlait going forward, their situation has improved remarkably, but of course still a lot of uncertainty that surrounds the company. The management team know what they have to face and seem to be confident they can meet those challenges and now seem to have more control on their future.

New Customer
They have onboarded Abbott, which only started 4-5 months ago and included FDA audits of their facilities which went well and what I imagine has been the big delay for onboarding Abbott. A sign that the product made could be headed for the USA rather than the international market, which would be massive for Synlait getting a foot in the US market.

Upgrading facilities
Most of their upgrade spending is almost finished, which included the new ERP system, which had a lot of interruptions on their supply chain, but now they will see the benefits of making such a massive upgrade to their system. Pokeno facility saw dryer and wetmix upgrades and sets them up to meet the demands of their new customer Abbott.

Inventory
Inventory levels have dropped in value, which has lowered the amount of debt they have taken on; the full year report shows inventory at $250m compared $467m at the half year. Thats had an affect on debt seeing that reduce to $421m from $528m.

Even with the sale of Dairyworks, the debt facility use is expected to remain the same with new customers inventory expected to require a similar amount. Full year report shows Dairyworks inventory at $52m, so some fairly decent size customers are expected to be onboarded.

Asset sale
Dairyworks financial contribution to FY24 is expected to amount to 6 months financials, so a sale and settlement is probably expected to be the very end of the year or start of next year. Dairyworks has a value of $177m on Synlaits books, that includes $52m inventory. Management seem confident a sale will go through, but have left the door open for possible capital raising if required.

Debt
Debt seems to be heading into a healthy direction. With a reduction in inventory requirements theres no need to hold so much debt now and there will start to be a positive contribution from Pokeno with onboarding of new customers. If they can complete the sale of Dairyworks and meet their $130m repayment that further reduces debt to more a manageable level and see a huge reduction in their interest expense bill. If Synlait head back to a reasonably profitable level they will be able to start paying back debt and things should look good onces again.

A2 dispute
The process regarding exclusivity for the production of A2's infant formula will likely go on for a while to come, but in the case they lose exclusivity it might not be that bad, remember A2 squeezes Synlait on their margins, in 12 months time they might have onboarded enough new business that its worth off loading the low margin volume for more higher margin business.

Share price
Current share price represents a opportunity to get into the company at a fairly reasonable price vs the risk they face. I've taken the chance this week to add to my position and feel pretty happy about the company's certainty especially knowing who their new major customer is and that debt is slowly coming back under control. With a market valuation of $312m, a reasonable profit in the current financial year could see them trading at a very low PE and could represent pretty good value.

[Bikeguy]

A lot to be excited about for Synlait going forward, their situation has improved remarkably, but of course still a lot of uncertainty that surrounds the company. The management team know what they have to face and seem to be confident they can meet those challenges and now seem to have more control on their future.

New Customer
They have onboarded Abbott, which only started 4-5 months ago and included FDA audits of their facilities which went well and what I imagine has been the big delay for onboarding Abbott. A sign that the product made could be headed for the USA rather than the international market, which would be massive for Synlait getting a foot in the US market.

Upgrading facilities
Most of their upgrade spending is almost finished, which included the new ERP system, which had a lot of interruptions on their supply chain, but now they will see the benefits of making such a massive upgrade to their system. Pokeno facility saw dryer and wetmix upgrades and sets them up to meet the demands of their new customer Abbott.

Inventory
Inventory levels have dropped in value, which has lowered the amount of debt they have taken on; the full year report shows inventory at $250m compared $467m at the half year. Thats had an affect on debt seeing that reduce to $421m from $528m.

Even with the sale of Dairyworks, the debt facility use is expected to remain the same with new customers inventory expected to require a similar amount. Full year report shows Dairyworks inventory at $52m, so some fairly decent size customers are expected to be onboarded.

Asset sale
Dairyworks financial contribution to FY24 is expected to amount to 6 months financials, so a sale and settlement is probably expected to be the very end of the year or start of next year. Dairyworks has a value of $177m on Synlaits books, that includes $52m inventory. Management seem confident a sale will go through, but have left the door open for possible capital raising if required.

Debt
Debt seems to be heading into a healthy direction. With a reduction in inventory requirements theres no need to hold so much debt now and there will start to be a positive contribution from Pokeno with onboarding of new customers. If they can complete the sale of Dairyworks and meet their $130m repayment that further reduces debt to more a manageable level and see a huge reduction in their interest expense bill. If Synlait head back to a reasonably profitable level they will be able to start paying back debt and things should look good onces again.

A2 dispute
The process regarding exclusivity for the production of A2's infant formula will likely go on for a while to come, but in the case they lose exclusivity it might not be that bad, remember A2 squeezes Synlait on their margins, in 12 months time they might have onboarded enough new business that its worth off loading the low margin volume for more higher margin business.

Share price
Current share price represents a opportunity to get into the company at a fairly reasonable price vs the risk they face. I've taken the chance this week to add to my position and feel pretty happy about the company's certainty especially knowing who their new major customer is and that debt is slowly coming back under control. With a market valuation of $312m, a reasonable profit in the current financial year could see them trading at a very low PE and could represent pretty good value.

Impressive, thank you for taking the time to put it out there👊

[BlackPeter]

A lot to be excited about for Synlait going forward, their situation has improved remarkably, but of course still a lot of uncertainty that surrounds the company. The management team know what they have to face and seem to be confident they can meet those challenges and now seem to have more control on their future.

New Customer
They have onboarded Abbott, which only started 4-5 months ago and included FDA audits of their facilities which went well and what I imagine has been the big delay for onboarding Abbott. A sign that the product made could be headed for the USA rather than the international market, which would be massive for Synlait getting a foot in the US market.

Upgrading facilities
Most of their upgrade spending is almost finished, which included the new ERP system, which had a lot of interruptions on their supply chain, but now they will see the benefits of making such a massive upgrade to their system. Pokeno facility saw dryer and wetmix upgrades and sets them up to meet the demands of their new customer Abbott.

Inventory
Inventory levels have dropped in value, which has lowered the amount of debt they have taken on; the full year report shows inventory at $250m compared $467m at the half year. Thats had an affect on debt seeing that reduce to $421m from $528m.

Even with the sale of Dairyworks, the debt facility use is expected to remain the same with new customers inventory expected to require a similar amount. Full year report shows Dairyworks inventory at $52m, so some fairly decent size customers are expected to be onboarded.

Asset sale
Dairyworks financial contribution to FY24 is expected to amount to 6 months financials, so a sale and settlement is probably expected to be the very end of the year or start of next year. Dairyworks has a value of $177m on Synlaits books, that includes $52m inventory. Management seem confident a sale will go through, but have left the door open for possible capital raising if required.

Debt
Debt seems to be heading into a healthy direction. With a reduction in inventory requirements theres no need to hold so much debt now and there will start to be a positive contribution from Pokeno with onboarding of new customers. If they can complete the sale of Dairyworks and meet their $130m repayment that further reduces debt to more a manageable level and see a huge reduction in their interest expense bill. If Synlait head back to a reasonably profitable level they will be able to start paying back debt and things should look good onces again.

A2 dispute
The process regarding exclusivity for the production of A2's infant formula will likely go on for a while to come, but in the case they lose exclusivity it might not be that bad, remember A2 squeezes Synlait on their margins, in 12 months time they might have onboarded enough new business that its worth off loading the low margin volume for more higher margin business.

Share price
Current share price represents a opportunity to get into the company at a fairly reasonable price vs the risk they face. I've taken the chance this week to add to my position and feel pretty happy about the company's certainty especially knowing who their new major customer is and that debt is slowly coming back under control. With a market valuation of $312m, a reasonable profit in the current financial year could see them trading at a very low PE and could represent pretty good value.

No doubt, you did list some opportunities. Might be worthwhile though to look as well into the risks:

- board basically controlled by Chinese interests. Their interests are clearly not always aligned with the interests of retail shareholders (who are clearly in the hands of the city of Shanghai, aka the Chinese government).
- board communication difficult - not all of the Mandarin speakers on board used to be sufficiently proficient in English. Did they fix that?
- still a political NZ board assignment - what else but colour does she add to the board?
- management put ESG over shareholders interests - and the results are clearly visible.
- board and management made huge mistakes in the past (missing diversification, screwing up a halfa*sed attempt to diversify with Talbot cheese, taking huge legal risks with Pokeno, lack of even basic sales channel management). Not quite clear to me, how we know they learned from these mistakes.

Good they have a new big customer. How do they know that they won't screw SML similarly as A2 did? Did you read and analyse the contract?

[winner69]

Good stuff silverblizzard and BlackPeter

BP asks a good question in have they learnt. From past mistakes. I’d have my doubts and would question whether they have the wherewithal to do so.

I suppose we could compile another list …like what else can go wrong to adversely impact performance and score that.

[xafalcon]

Inventory
Inventory levels have dropped in value, which has lowered the amount of debt they have taken on; the full year report shows inventory at $250m compared $467m at the half year. Thats had an affect on debt seeing that reduce to $421m from $528m.

This is merely normal NZ dairy industry seasonal inventory levels, and will repeat ad infinitum

It does not indicate any material improvement in inventory management

In fact, carrying $250M inventory at the seasonal low point is terrible. It should be much lower

I have worked in NZ dairy industry (management) for over 30 years. I even used to contact SML to manufacture IF, but we could not live with their poor quality and terrible DIFOT, so we exited Dunsandel production

[silverblizzard888]

Impressive, thank you for taking the time to put it out there

Your welcome!

Good stuff silverblizzard and BlackPeter

BP asks a good question in have they learnt. From past mistakes. I’d have my doubts and would question whether they have the wherewithal to do so.

I suppose we could compile another list …like what else can go wrong to adversely impact performance and score that.

Indeed a management team to watch closely, they've made too many mistakes and not enough evidence to prove its behind them.

No doubt, you did list some opportunities. Might be worthwhile though to look as well into the risks:

- board basically controlled by Chinese interests. Their interests are clearly not always aligned with the interests of retail shareholders (who are clearly in the hands of the city of Shanghai, aka the Chinese government).
- board communication difficult - not all of the Mandarin speakers on board used to be sufficiently proficient in English. Did they fix that?
- still a political NZ board assignment - what else but colour does she add to the board?
- management put ESG over shareholders interests - and the results are clearly visible.
- board and management made huge mistakes in the past (missing diversification, screwing up a halfa*sed attempt to diversify with Talbot cheese, taking huge legal risks with Pokeno, lack of even basic sales channel management). Not quite clear to me, how we know they learned from these mistakes.

Good they have a new big customer. How do they know that they won't screw SML similarly as A2 did? Did you read and analyse the contract?

The politics can go both ways of course, while it can go against shareholder interest it can also work in favour too. Apparently Bright gave Synlait considerable help with navigating the SAMR renewal and probably the recent refinance with the banking syndicate involving quite a few Chinese banks, but of course in the future it could be different. So far we are yet to see too much direct politic interest and intervention at play in the dairy sector by chinese interest. 3 out of 8 of the board are Chinese and represent Bright, as long as 1 is proficient in English then that should help at least the other 2 translating if they aren't as proficient.

Three main factors have cause Synlait havoc and thats the low margin A2 contract which we can see A2 benefited hugely with their massive profits over the years and the ESG stuff really stuffed the company from being profit orientated to being about sustainability and the mismanagement of their growth strategy fueled by massive debt.

Yes Synlait have made many mistakes over the past for the sake of gain more growth, whether they've learned their lesson or not and whether they have become more competent at it remains a question mark. For now they don't seem to be doing to much else except focusing on their main business and getting it back on track. Pokeno is getting on with business and the sale of Dairyworks is the end of branching out.

Abbott could be doing a similar thing that A2 has done by squeezing them, but at least it diversifies their revenue base. They've clearly relied on A2 for far too long and having another big contract would give them some leverage to not rely so heavily on A2. At the end of the day if you invest in the company you have to trust management are doing the right thing or best not to invest and find a company with a more reliable management team.