Saturday, April 20, 2024

Synlait Milk’s Bright spark in turbulent times

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Corporate governance that stretches all the way to Shanghai has been key in continuing to tap Chinese customers.
While Synlait’s revenue continued to march higher, hitting $1.66bn in the July 2022 year, margins have been getting squeezed.
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Synlait Milk first tried tapping the market for funds back in 2009. 

The upstart dairy processor had already come a fair way building a factory in Dunsandel in Canterbury and wanted to double capacity with a second plant, with a figure of $150 million bandied about. 

Back then, New Zealand’s capital markets were lacklustre. The global financial crisis had sapped investors’ confidence, dairy prices were in the doldrums, and Fonterra was still reeling from the San Lu melamine disaster. 

Enter Bright Dairy & Food with an $82m injection in what was the Chinese firm’s first foray overseas. For Synlait, it provided not only cash to expand the infant formula plant but also a partner to tap the growing middle classes of Asia’s largest economy. 

In the July 2011 year, Synlait didn’t quite turn a profit, delivering a loss of $3.1m on revenue of $298.9m and total assets of $247.9m. The prior year, preceding Bright Dairy’s injection, the loss was $11.7m on revenue of $233.4m and assets valued at $151.1m. 

Bright Dairy retained its controlling 51% stake in the milk processor for a few years before it was diluted down in an initial public offering in 2013 to raise about $75m of new equity at $2.20 a share to further expand the Dunsandel factory. 

The offering was well-received and the shares climbed almost 20% on debut, valuing the company at about $402m. 

Synlait’s maiden result as a listed company came a few months later in the wake of Fonterra’s tainted whey protein concentrate scare when it posted a profit of $11.5m in the July 2013 year on revenue of $420m and total assets of $346.1m. 

The milk processor’s fortunes continued to improve as the canny milk marketing firm A2 Milk tapped Chinese consumers like no other, and in 2018 Synlait’s shares peaked at $13.40, valuing it at $2.4 billion. 

The company bragged of doubling its annual net profit to $74.6m on revenue of $879m in the July 2018 year, on a total asset base of $793.7m. 

Plans for a Pōkeno factory emerged and founder John Penno handed over the chief executive baton to Leon Clement to guide the next path of growth. 

While Synlait’s revenue continued to march higher, hitting $1.66bn in the July 2022 year, margins have been getting squeezed and the company’s even had to wear some red ink in recent years. 

Purchases of Dairyworks and Talbot Forest Cheese didn’t pan out, with both investments back on the market to help Synlait shore up a stretched balance sheet without having to tap its owners for new equity. 

The share price slumped to as low as $1.38 earlier this year, and at the recent price of $1.70, the company is valued at just $371.6m. 

All manner of initiatives have been put in place and the senior leadership team has had a good shake-up. The milk processor got a modicum of good news this month when China’s State Administration for Market Regulation re-registered it to keep producing A2 Milk’s infant formula bound for China. 

One of the telling statements at the time was from A2 Milk chief David Bortolussi, who thanked his firm’s partner China State Farm – whose parent is the minority partner in A2’s Mataura Valley Milk factory – and Synlait’s Bright Dairy. 

China State Farm’s parent China National Agriculture Development Group is a state-owned enterprise, while Bright Dairy is owned by the Shanghai municipal government. 

Both have played key roles in the success of A2 Milk and Synlait in continuing to tap Chinese customers for the past decade, and Bright Dairy’s continuing involvement should provide a degree of comfort to the milk processor’s 6500 or so fellow shareholders. 

For Synlait, that’s partly because Bright Dairy retains effective control of the board, with its constitution giving the Chinese company four directors provided it retains its stake above 39%. 

The company’s latest appointments also make clear how important the Chinese company is taking its NZ investment. 

Bright Dairy’s director of strategy, Sihang Yang, has been on Synlait’s board since 2010, and professional director Ruth Richardson – who’s also a director of the Bank of China – is also an appointee of the Chinese company. 

More recently, Bright Dairy has appointed its chief financial officer Liu Ruibing and vice-president Zhu Yi to Synlait’s board – that’s some financial heft that will be coming from the board, which will keep the new executive team’s feet to the fire as they try to steady the company after a fairly tumultuous time. 

While Chinese imports of most dairy products are on the decline, infant formula remains in hot demand, which bodes well for the A2-Synlait double act. 

That just leaves fending off Fonterra’s attempts to woo back supplying farmers with its less cash-hungry capital structure, navigating the increasingly narrow tightrope of environmental regulation, and getting back on a pathway of sustainable profitability. 

The white rivers of gold don’t seem quite as calm in the 2020s as they did in the 2010s.

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