Synlait: We’re back on profit track
Synlait Milk says its net profit — excluding the sale of an Auckland property — jumped by 128 per cent to $14.5 million in the first half, but the dairy manufacturer does not expect to see the same level of earnings growth in the second half.
The company — which among other things makes infant formula for its part-owner, a2 Milk — said it was also on the way to reporting previous levels of profitability in the 2023 financial year after posting a $28.5m loss in 2021.
While the company expects robust earnings this financial year, a number of external factors could weigh on its result. These included:
● The impact of Omicron and broader labour shortages in New Zealand on Synlait’s workforce, which remained unknown. “This could impact Synlait’s ability to operate at normal production levels in the short term.”
● Ongoing disruptions to global supply chains due to Covid-19 and geopolitical issues which could affect Synlait’s ability to procure raw materials and to export products.
• Dairy commodity prices continuing to rise due to strong global demand outrunning restricted supply, which could potentially create downside risk in 2022, and equally an opposite upside opportunity in 2023, due to lags in the price of contracts with large multinational customers.
Including the property deal, Synlait’s net profit jumped by 338 per cent to $27.9m.
Revenue was up by 19 per cent to $790.6m and net debt fell by 19 per cent to $391.8m.
Operating cash flows were up 269 per cent at $117.3m and capital expenditure was down 37 per cent to $46m.
Synlait’s share price rallied by 12c to $3.43 after the result’s release.
Chair and co-founder John Penno said the first-half result reinforced the focus and hard work undertaken to get Synlait back on track after a “challenging” 18 months.
“Having been part of Synlait from the outset, I saw it as extremely important to help lead the company through its recent challenges and set it up for future success,” he said in a statement.
“While the job is not yet done, we have made some big steps in the right direction as we reset our leadership and rebuild our profitability and balance sheet.”
Chief executive Grant Watson, who has been in the job for two-anda-half months, said momentum was building but to return Synlait to strong, sustainable growth the company needed a greater level of focus and accountability across the organisation.
“Improving our systems, tools and processes will improve our ability to execute with excellence,” he said.
“This is a significant opportunity and will be our focus for the second half.”
Synlait expects its net profit to return to robust profitability in 2022 after last year’s loss, based on tighter management of its ingredient business, improved infant base powder volumes, a growing contribution from its lactoferrin and consumer foods businesses and retained cost savings.
The result included a one-off gain of $17.1m from the sale and lease-back of the land and building at Synlait Auckland, which was realised in the first half.
Planned reductions in inventory at Synlait and Dairyworks will generate operating cashflows in excess of earnings.
These strong cashflows would enable Synlait to complete its capital expenditure programme and reduce debt to comfortable levels over the next two years.
Synlait said its performance will build into 2023 as production for its new multinational customer at Synlait Pokeno ramps up and its consumer foods business continues to grow.
“Board and management still expect that by the end of 2023 the recovery plan will have seen Synlait return to similar levels of profitability, operating cash flows, and debt ratios as per the years leading into 2021.”
Jarden senior analyst Adrian Allbon said the result showed execution, in particular the flagged selldown of excess inventories generating strong cash flows and debt reduction.
Looking ahead, Allbon said in a research note that the risks included the recovery in demand from a2 Milk, commodity price volatility, and/or diversification and debt reduction.