Dairy factories spending up

20:33, Mar 27 2014

South Island dairy processors are upsizing with nearly $135 million of extra factory investment to chase a growing milk powder export market.

Synlait Milk yesterday committed an extra $32m to help expand milk drying capacity at its Dunsandel plant.

Competitor Westland Milk Products said it would invest $102m on a new nutritionals-infant formula dryer in Hokitika.

Both companies have undergone rapid growth, though yesterday NZX-listed Synlait Milk said issues remained with the Chinese infant formula market.

Shares in Synlait lost ground yesterday in response to the dairy manufacturer dropping its full year profit forecast to between $25m and $30m from a previous forecast range of $30-$35m. The shares closed 28c or 7 per cent weaker at $3.71.

Grant Williamson, director in brokerage Hamilton Hindin Greene, said a share price fall, such as that by Synlait yesterday, happened when companies built up expectations but then had issues "and can't meet them".


"Obviously shareholders were pretty disappointed with the result and subsequently we've seen the share price down 7 per cent on the back of that . . . Hopefully it's only a short term issue for them."

The drop could be attributed to the tougher regulatory environment in China, and also a negative impact from a recall around Fonterra's WPC80 powder ingredient. Concerns about botulism contamination proved to be a false alarm.

Synlait Milk chairman Graeme Milne said infant formula imports by the Chinese virtually dropped to zero in August last year after the Fonterra scare, followed by a gradual recovery.

Synlait's factory had been visited by Chinese "regulators" in the last couple of weeks as part of a tour of New Zealand factories.

Yesterday Synlait Milk committed $30m extra towards the Dunsandel plant.

Managing director John Penno said extra funds would be used to prepare the site for an eventual fourth large scale spray dryer.

Combined with the extra capacity that would increase the cost of the project to $135m.

The dryer is one of six core projects on which Synlait is now spending an estimated $235.4m, up from $187.8m disclosed in its prospectus forecast.

"[The expansion] is in response to the way we're engaging with the multinational companies we have on board now, bigger volumes meaning longer runs on the plant and equipment and higher standards needing to be achieved."

Westland Milk Products chief executive Rod Quin yesterday said a resource consent application to build the $102m purpose-built spray drier plus additional warehousing, a new laboratory and a packing line, was underway.

The new dryer was part of a production shift toward high-end nutritional products, such as infant formula, older persons' nutrition, and sports nutrition, which delivered higher margins than milk powders.

"Westland would not be investing more than $100m in a new nutritional dryer if it was not confident there would be continuing and growing market demand."

Quin said the company had been working closely with Chinese authorities.

With the dryer, Westland will produce an additional 23,000 metric tonnes of nutritional product per season, generating sales of an expected $115m a year at full capacity.


Synlait Mil

- Listed on the NZX

- Dryer three project will now cost $135m, up from $103.5m

- Infant formula will account for 30 per cent of production by 2014/15 season

Westland Milk Products

- A co-operative owned by dairy farmers on the West Coast

- D7 dryer investment will cost $102m including a packing line

- The investment will create 36 new jobs