Synlait Milk Limited

 

SM1 Details
 
SM1’s Expected Milk Price Update: Synlait Milk Limited (ASX: SM1) is a dairy manufacturer, which is dedicated on providing higher value dairy products to top milk-based health and nutrition companies. As on 4 June 2020, the market capitalization of the company stood at $1.17 billion. In a recent update, the company forecasted base milk price for FY20 to reduce to ~$7.05 kgMS from $7.25 kgMS. Further, the company expects initial FY21 season base milk price to be $6.00 kgMS. Although the company is currently unable to gauge the full impact of COVID-19 outbreak, it, however, expects conservative opening forecast in FY21 season. 
 
1HFY20 Key Highlight: During 1H20, the company witnessed a growth of 22% in sales of consumer-packaged infant formula and reported an increase of 19% in revenue to $559 million. In the same time span, the company’s EBITDA stood at $67.6 million, with NPAT of $26.2 million, down 30% due to higher depreciation and interest costs. During the quarter, total milk processed increased by 8.5% due to a higher milk supply for Pokeno.
 

1H20 Financial Highlights (Source: Company Reports)
 
COVID-19 Update: In the times of the global pandemic, the company is operating as an essential service. It has been delegated with a responsibility to help feed New Zealanders. The company is not facing any material operational impact and is managing risks through solid relationships with raw material suppliers and logistics partners. The company has progressed well on its material customer opportunities which are likely to diversify the company’s portfolio and will fill up new facilities. SM1 has a strong customer pipeline and has made robust progress towards its long-term strategy.
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Approach (Source: Refinitiv, Thomson Reuters)
 
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: The stock of SM1 closed at $6.6 and is trading at the lower band of its 52-week trading range of $4.33 to $9.75.As per ASX, the stock of SM1 gave a positive return of 2.14% in the past one month. During 1H20, gross margin of the company stood at 14.8%, and net margin was 4.7%. Considering the decent financial performance, the resilience of the business in an uncertain environment and modest outlook, we have valued the stock using EV/Sales multiple based illustrative relative valuation approach and arrived at a target price with an upside of low double-digit (in percentage terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $6.6, up by 1.227% on 4 June 2020.

 
SM1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
 

Freedom Foods Group Limited

 

FNP Details
 
COVID-19 Update: Freedom Foods Group Limited (ASX: FNP) is engaged in the sourcing, selling, marketing, manufacturing, and distribution of specialty cereal, snacks, and dairy beverages. The market capitalisation of the company stood at $986.07 Mn as on 4 June 2020. The company has recently updated the market with its trading performance and impact of COVID-19. FNP stated that scale and diversification of activities normalised through May to pre COVID volumes in Australian-based food manufacturing capabilities. The company is increasing export demand in SE Asia and China from retail grocery channels. Sales to SE Asia and China signified around 17% of total net sales value in the 1HFY20. Sales to China in 3QFY20 recorded a 35% decline relative to pre COVID 19 plan, signifying the restrictions throughout February and March. Sales into China and SE Asian markets are regaining in 4QFY20.Further, the company is reshaping its operational footprint to increase efficiency and achieve material cash savings in FY21.
 
Other Recent Update: The company stated that Ms Jane McKellar will join its Board as an independent non-executive director.
 
1HFY20 Key Highlight: During 1HFY20, net sales of the company stood at $277.1 million, up 32.6% year over year and witnessed a growth of 55.6% in operating EBITDA which came in at $32.7 million. This resulted in an increase of 42.1% in operating net profit to $9.1 million. The decent financial performance of the company enabled the Board to declare an interim dividend of 2.25 cents per share.
 

Key Highlight (Source: Company Reports)
 
Valuation Methodology:EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of FNP closed at $3.77 and is trading at the lower band of its 52-week trading range of $3.41 to $5.98.As per ASX, the stock of FNP gave a negative return of 31.74% in the past six months. Current ratio of the company stood at 1.37x in 1H FY20, reflecting YoY growth of 20.5%. This implies that the company has improved its position to address its short-term obligations. The company is well positioned to build into a major global food and beverage business with scale. It remains focused on driving the dairy business towards specialty and high value-added products by increasing the base of dairy volume. FNP expects a positive impact on sales and earnings from new product revenue streams. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Blackmores Ltd (ASX: BKL), Bega Cheese Ltd (ASX: BGA) and A2 Milk Company Ltd (ASX: A2M), to name few and arrived at a target price, which is offering an upside of low double-digit (in percentage terms). Therefore, considering the above factors, improved liquidity position, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $3.77 per share, up by 5.602% on 4 June 2020.
 
 
FNP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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