A Broker's View: Synlait

Last updated 05:00 01/02/2014

Relevant offers


Manawatu-Rangitikei milk production down Milk production below last season at Westpac Taranaki Agricultural Research Station Specialist Emma Cuttance will tell Taranaki farmers how to manage facial eczema Ballance Taranaki Farm Environment Awards will go ahead in 2017 Carina Chaves of Costa Rica finds Taranaki winter tough Bailey, Farrelly to step down from Fonterra board New Zealand's clean and green image no selling point for Synlait chief Gertie's gas: How a single cow contributes to climate change All-grass farming at the Lincoln dairy farm Farmers encouraged to enter awards

Company: Synlait

Sector: Dairy Processing

Overview: Synlait were one of a slew of new listings in 2013 and has so far been one of the more successful recently reporting it will beat its net profit after tax prospectus forecast by as much as 76 per cent. However, the Rakaia-based milk processor cannot point to operational improvement as the key to its recent profit upgrade but instead has a unique divergence between cheese and milk solid prices to thank for its surplus.

Pros: Because Synlait focus purely on milk powders this divergence helped Synlait's bottom line, whereas the elephant in the room (Fonterra) also produces cheese. Demand for milk powder, led by China, has outstripped cheese of late which has meant Fonterra's cheese operations are currently loss-making. To mitigate these losses Fonterra artificially held the farmgate milk price at lower levels than would otherwise have been the case. By overruling the farmgate price Fonterra has inadvertently lowered the cost of production for Synlait. Synlait still benefits from the higher milk solid prices due to the aforementioned Chinese demand, meaning its profit for the 2014 financial year will be in the range of $30 to $35 million.

Cons: The strong profit update was expected by the market with many analysts actually expecting a better result. What was not as anticipated was the announcement the company is suffering "considerable disruption" in the Chinese market due to regulatory changes. Synlait will hope it has successfully navigated the Chinese regulatory environment by the time it completes the new Dunsandel processing facility which is forecast to increase production from 91 million tonnes of milk product to 140 million tonnes. Other risks include potential damage or shut down of its processing facility, bio-security events such as foot and mouth disease, or milk contamination that could impact the reputation of New Zealand milk. Any disruptions to the milk supply, such as extreme weather, will also hurt earnings.

Price performance: The initial public offering price was set at $2.20 with the stock closing out its first year as a listed company up 79 per cent at $3.94. The stock hit fresh highs of $4.20 in January before coming back to recently trade at $3.74.

Investment outlook: Growing earnings from 2014's result will be difficult, however, in the long term earnings growth will be achieved with increases in production and high demand for product. The recent pull back gives some value for investors looking for agricultural exposure.

Ad Feedback

*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

Special offers

Featured Promotions

Sponsored Content