Thursday, April 25, 2024

Could A2 Milk be eyeing a bigger stake in Synlait Milk?

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Speculation follows renewal of company’s licence to produce infant formula for China.
Synlait attributed the dip in profits to further demand reductions that affected consumer-packaged infant formula volumes and base powder production.
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Good news from Synlait Milk could lead to A2 Milk eyeing a bigger stake in the dairy processing company. 

Synlait shares shot up on Tuesday on news it was re-registered by China’s State Administration for Market Regulation (SAMR) to produce A2 Milk’s Chinese-labelled infant formula at its Dunsandel facility.

In early June, investors were also cheered when it announced plans to sell its Dairyworks and Talbot Forest Cheese (TFC) businesses as part of its asset/capital structure review. 

Shares in Synlait are now up 17.4% this month to $1.82, giving it a market capitalisation of $397.8 million. 

A2 Milk did not immediately comment on whether it is interested in a larger stake in the company but it does have a vested interest in ensuring a healthy Synlait as it cannot sell its China-label infant formula without the dairy processor. 

News of the SAMR re-registration is a “good outcome” and, following the flagged sale of its brands business, could “open the door to being acquired by A2 Milk”, said Brad Gordon, director of Hobson Wealth.

A2 Milk already owns nearly 20% of Synlait and the two companies have had a manufacturing and supply arrangement since 2012.

The current agreement has an effective minimum term until July 31, 2025. 

Øyvinn Rimer, director and senior research analyst at Harbour Asset Management, said it “seems reasonable” for A2 Milk “to look at it more closely now that SAMR approval has been received”.

He noted, however, it will still face the hurdle of Bright Dairy having a blocking stake and would need its agreement to get a deal done.

Bright Dairy Holding Ltd has a 39% stake in the company. 

Synlait has been under pressure to rein in debt in the face of mounting losses, with its share price falling as low as $1.38. 

In late April, Synlait Milk slashed its forecasts and said the full-year result would range between a loss of $5m and a profit of $5m. That was well down from its March estimate of profit ranging between $15m and $25m. 

It also said it was reviewing its capital strategy to ensure it had appropriate funding in place, but emphasised it was not considering an equity capital raising. 

Forsyth Barr analysts Matt Montgomerie and Benjamin Crozier estimate potential sales proceeds from Dairyworks and Talbot Forest Cheese of $150m using current earnings and applying prior transaction multiples. 

“A sale would reduce pro-forma FY23 net debt to around $275m, versus our current forecast of ~NZ$425m,” they said. 

It doesn’t mean the company is out of the woods.

“While incrementally positive, this is only a baby step in SML’s recovery.” 

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