Continuous Disclosure: Will Synlait’s ‘perfect storm’ mean another capital raise?

Will Covid-19’s impact prompt Synlait Milk to go back to the market?

An unfortunate chain of events has led Synlait to downgrade its 2021 earnings for the second time.

The first downgrade came on December 21, when the dairy processor said its 2021 profit would be half that of the previous year’s $75.2 million, as a result of reduced demand from key customer and cornerstone shareholder a2 Milk.

On March 4, Synlait scrapped that guidance altogether, citing “significant uncertainty and volatility within its business”.

And this week Synlait, in reporting a 76 per cent slump in its first-half profit to $6.4m, said it now expected a “broadly breakeven” result for theyear.

The news is not all bad for Synlait: its newly acquired Dairy Works, which reported first-half revenue of $112.6m, is performing well and to the company’s expectations.

But production of infant base powder – a key driver of Synlait’s business – slumped by 60 per cent in the half.

Covid-19 hit the company as it came to the tail end of a significant investment phase.

Forsyth Barr analyst Chelsea Leadbetter said the challenge facing Synlait was that its large fixed costs made it difficult for the company to respond quickly to changes, against the backdrop of volatile commodities markets.

Synlait successfully raised $200m from the market last November to provide it with more financial headroom amid the challenges posed by Covid-19.

Chief executive Leon Clement said this week that Synlait faced several headwinds. “We will need time to get through this, but we remain confident about our future,” he said.

“Our investment phase is complete. We have the capacity, capability, and customer base to generate significant value.

“Covid-19 hit us late, but we will emerge from the pandemic a stronger, more sustainable Synlait.”

The company continues to experience volatility in its business due to ongoing uncertainty in The a2 Milk Company.

The sudden drop in demand for consumer-packaged infant formula, combined with rapidly rising Global Dairy Trade prices, foreign exchange movements, and a changing product mix had created volatility which limited returns.

Shipping delays were also expected to hit the 2021 result.

While all banking covenant ratios were met during the first half-year of 2021, Synlait said it was “pro-actively engaged” with its banking syndicate to increase its leverage ratios to manage any risk at the end of 2021.

Asked in a results conference call about the possibility of another capital raise, Synlait’s chief financial officer Angela Dixon said: “I’m loath to go back to the capital markets at this point to further dilute our shareholders.

“This is what we are perceiving as a timing issue,” she said.

“We just don’t know when the swing back is.”

Will they, won't they?

“The market’s focus has gone on to whether Synlait needs to go again,” said Craigs Investment Partners analyst Stephen Ridgewell.

“Certainly, equity raising is a possibility,” he said.

Synlait’s earnings downgrades come at a time when it is investing at Pokeno, south of Auckland, to accommodate a new multinational customer coming on stream in 2023.

“At the same time they have got this decline in demand from a2 Milk, so it really is a perfect storm for them, and one that is very hard to forecast,” said Ridgewell.

Synlait’s inventories could take time to re-balance. If it takes longer than expected, the company may look again at raising equity.

“If the storm continues for six to 12 months, then it obviously creates that possibility,” he said.

Craigs expects to see a recovery in earnings in 2022, “but we are probably looking at the second half of 2022 before we see a meaningful bounce back,” said Ridgewell.

As is always case with Synlait, much will depend on how the fortunes of its biggest customer, a2 Milk, and the jury on a2’s earnings is still out.

A2 Milk’s most recent guidance for 2021 is for revenue of around $1.4 billion and an EBITDA margin of 24 per cent to 26 per cent.

Much will depend on the unofficial, or “daigou”, trade out of Australia, which has played a big part in a2 Milk’s success.

“We don’t see [daigou] coming back to the way it was before Covid, so there has been some structural change in that channel,” Ridgewell said.

Craigs has been bearish on both companies’ prospects since the middle of last year.

“From here, we expect a2 Milk will need to downgrade its full-year 2021 guidance,” he said.

Despite both companies’ best efforts, it seems they remain joined at the hip.

Nasdaq Listing?

A tilt towards America on both its management and investor front has Stock Takes wondering if Pushpay will pursue a Nasdaq listing any time soon.

The company, which specialises in providing technology to allow churchgoers to donate money online, last week saw founding investors Peter and Christopher Huljich sell their remaining shares in the company to US investment firm Sixth Street for $320m.

The deal means Sixth Street is now Pushpay’s largest shareholder at 17.8 per cent, and comes on top of a change at the CEO level.

In January Pushpay appointed Seattle-based Molly Matthews as its chief executive, replacing New Zealand-based Bruce Gordon. It is the first time the company has had its CEO based in the US, the source of most of its revenue.

Pushpay, which still has its head office in New Zealand, has toyed with the idea of a NASDAQ listing in the past and it is seems it could still be a possibility.

Pushpay head of investor relations Gabrielle Wilson said at this stage there were no immediate plans for a US listing.

“However we periodically review the costs and benefits of listing in the US. To date we have concluded that remaining listed on the NZX and ASX is appropriate, however we will continue to review this over the long term.”

But a move to a US exchange may not be popular with some of its other investors.

A change for Ritchies?

New Zealand bus company Ritchies has called in corporateadvisory firm Cameron Partners to assess its options, according to the Australian Financial Review.

Family-owned Ritchies has been going for 80 years, offering bus and coach hire services to schools, businesses and the general public.

Over the last five years the company has spent $180m on new vehicles.

From humble beginnings in the small South Island town of Temuka, Ritches now has 1200 vehicles and 1800 staff.

Estate watch

Analysts will be watching house price changes closely, given the close link they have to retirement villages.

Apartment price increases are generally factored into analysts’ asset valuation calculations and any changes to those assumptions could have a dramatic effect on their net tangible asset backing.

“The companies generally trade well above their net tangible asset backing as well,” said Richard Stubbs, co-founder of Castle Point Funds.

“Ryman tops the list, with a market capitalisation a whopping three times above its net tangible asset backing.”

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