Synlait doubles profit, plans to buy local manufacturer

Synlait Milk continues to expand through acquisitions and has doubled investment in research and development on the back of another bumper profit result.

The Canterbury dairy company posted an 89% jump in full-year net profit to $74.6 million in the year ending July 31, with sales rising from $759 million to $879 million.

The shares initially rose 4c to $12.82, having gained 130% over the past 12 months as the leading NZX performer. However, the stock closed Wednesday down 6.2% at $11.94 as investors reacted to the company's comments that infant formula sales will probably grow at a slower pace.

Synlait also announced plans to acquire selected assets from South Canterbury boutique manufacturer, Talbot Forest Cheese, for up to $40 million depending on incentives for various conditions to be met.

“The proposed acquisition contributes to our intention to grow within the Everyday Dairy category in New Zealand (which is a notable $2 billion market) and overseas,” new chief executive Leon Clement says.

The deal is structured in two parts, with settlement expected in August 2019.
An initial 10-month period includes a commercial loan facility from Synlait for Talbot to complete a capital works programme and satisfy conditions of sale.

The proposed acquisition includes property, plant and equipment at a new 12,000-tonne Temuka site, the consumer cheese brand and customer relationships.

Commenting on the result, chairman Graeme Milne says an increase in finished infant formula sales helped drive profit, assisted by a number of investments in the blending and consumer packaging space.

“That is a gratifying 16% growth in top line and an 89% growth in bottom line,” says Mr Milne.

He cited the November 2017 completion of Synlait’s second Dunsandel wetmix kitchen, and its Auckland blending and consumer packaging facility as key projects to boost finished infant formula capacity.

Meanwhile, the company announced its final average total milk price for the season just finished at $6.78/kg of milk solids.

However, like Fonterra, Synlait cut its forecast milk price for the 2018/19 to $6.75/kg from a previous forecast of $7.00/kg.

The fall was mitigated to some extent by a weakening New Zealand dollar. However, the forecast “anticipates that there will be an improvement in commodity prices in the medium term,” the company said.

Hunting for suppliers
Synlait says its partnership with the A2 Milk Company continues to grow and the company is also working to secure product registration in China for New Hope’s Akara and Bright Dairy’s Pure Canterbury brands.

In February Synlait bought 28ha of land in Pokeno and started building a new infant-capable manufacturing facility.

The company says it is actively recruiting milk suppliers in the Waikato area. 

“This is a $280 million commitment, but it will allow us to keep up with customer demand, whilst also eliminating our single-site risk,” Mr Milne says.

Synlait has also doubled its commitment to research and development, and expects this to increase to 1.5% of revenue in 2019.

Mr Milne paid tribute to former chief executive John Penno, who stepped down last month.

“John has been a wonderful leader for Synlait, taking the company from startup to a market capitalisation of over $2 billion in 10 years. Fortunately, he will remain a part of the company in his capacity as a director.”