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UPDATED: Synlait shares drop 5.9% after second profit warning

Shares in Synlait Milk [NZX: SML] fell 5.9 percent after the dairy processor, which counts China’s Bright Dairy as a cornerstone shareholder, cut its full-year earning forecast for the second time this year as a strong currency and an unfavourable product mix weighs on the exporter.

The Rakaia-based company cut its forecast profit range to between $17.5 million and $22.5 million in the year ending July 31, from a March estimate of $25 million and $30 million. In January it forecast annual profit of between $30 million to $35 million. Its prospectus forecast profit of $19.8 million.

The shares dropped to an eight-month low $3.15, and recently traded at $3.20 on the NZX, still 45 percent above its $2.20 listing price last July. The shares climbed as high as $4.11 in mid-January.

"Investors are getting a little bit nervous because of the volatility of their guidance and their share price," Grant Williamson, director at Hamilton Hindin Greene told BusinessDesk. "This is not the first time they have had to adjust their guidance and it reflects the fact forecasting in that industry with accuracy is difficult.

"It's been a bit of a rollercoaster ride for investors," said Williamson.

The company said the high kiwi dollar and volatility in global dairy prices, as well as a reduced advantage from its product mix, had weighed on revenue and forecast earnings. Synlait lowered the bottom end of its forecast milk payment to suppliers for the full-year to $8.20 to $8.40 per kilogram of milk solids from a previous forecast of $8.30 to $8.40 kg/MS and said it expects to pay a lower price for the upcoming 2015 season of $7.00 kg/MS, matching the forecast made earlier this week by its the nation's dominant dairy company Fonterra Cooperative Group.

"We had been expecting to maintain the benefits of a very favourable product mix for the remainder of this financial year, however the exceptional market conditions experienced in the first half of the year have moderated,” Synlait chairman Graeme Milne said.

In January, Synlait said it expected sales of baby formula to fall below its 10,000 metric tonne target this year because stricter Chinese regulations had caused “considerable disruption” in that market. Earlier this month, the dairy exporter missed out in the first round of approvals under new Chinese regulations, preventing it from exporting infant formula to that market.

"It would be a boost for the company if that license was to come through for them," Hamilton Hindin Greene's Williamson said.  The company is expected to gain approval from Chinese authorities once its new packaging and processing plant is completed. The dairy processor is spending $21 million expanding its laboratory and administrative facilities, in part to increase its testing capabilities.

"The infant formula and nutritional market continues to prove challenging due to regulatory changes in China and it is clear that we will not meet our volumes targets for this year," said Synlait managing director John Penno. "The development of this business in key markets outside of China with our tier on multi-national companies continues to be strong and we remain confident of meeting our long term objectives."

The company expects to publish its full-year earnings on Sept. 24.

(BusinessDesk)