Synlait Milk Limited

SM1 Details

Synlait Milk Limited (ASX: SM1) provides infant nutritional products that include milk powder for infants, base pediatric powders, adult nutritional formulations, functional food ingredients and lactoferrin. SM1 was listed in ASX on 25^th November 2016.

Recent Business Updates: As per the announcement by Agriculture Minster Damien O’Connor on December 6, 2021, a partnership between SM1, Danone, AgResearch, and the Ministry of Primary Industries’ Sustainable Food and Fibre Futures Fund has been formed to study the impact of changes in soil health on production, farm resilience, and the impact on climate change. This study covers ten farms in Waikato, Canterbury and Otago for a period spanning over five years.

On 22^nd November 2021, Min Chen (Joyce) was appointed to the Board of SM1, replacing Min Ben. The appointment was made by Bright Dairy Holding Limited, which owns a 39.0% stake in SM1 and has four board seats.

Takeaways on 2021 AGM Presentation:

• SM1 clocked an uptick of NZ$65 million in sales to reach NZ$1.4 billion in FY21.
• It had posted a net loss of NZ$28.5 million. This is down by NZ$103 million over the last year.
• SM1 intended to reach revenue of NZ$2 billion in FY22 by separating its ingredient business so as to focus on improving utilization at factories, building efficiencies in the supply chain and maintaining a lean cost structure at par with its peers.
• It plans to build scale in nutritional business through volumes once commercialization kicks in at Synlait Pokeno facility. Further, SM1 intends to rebuild its infant base powder business.
• In the beverage and cream business, SM1 plans to line up products catered to China, Australia, and the New Zealand markets. It had launched Synlait Swappa Bottle and Dairyworks fresh milk range of products to Foodservices recently.

Revenue Break-up & Comparison (Source: Analysis by Kalkine Group)

Key Risks: SM1 is exposed to fluctuations in foreign currencies as it draws revenues from worldwide. Due to intense reliance on China, threats on import ban and geopolitical tension may derail growth prospects. Supply chain disruptions and ingredient costs may affect margins. Infant nutritional supplement business invites regulatory oversight.

Outlook: SM1 expects to return to profitability in FY22 driven by improved volumes in infant base power, higher contribution by its beverage and cream business and disciplined cost structure in Dairyworks and Talbot Forest Cheese business. Its FY22 results should also include a one-off gain of NZ$17 million from the sale and leaseback of land and building at Synlait Auckland facility. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last nine months, the stock has corrected by ~12.60%, and it is trading below to the average of its 52-week low-high band of $2.640-$5.00, indicating an accumulation opportunity. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight discount to its peers, considering its significant reliance on China for infant business and losses in FY21. For the valuation purpose, peers such as A2 Milk Company Ltd. (ASX: A2M), United Malt Group Ltd. (ASX: UMG), Bega Cheese Ltd. (ASX: BGA), and others have been considered. Considering the launch of products in the beverage and cream business, growth focus in ingredient business, lean cost structure strategy, optimistic outlook, upside indicated by the valuation, and key associated business risks, we recommend a “Speculative Buy” rating on the stock at the current market price of $3.120, as on 17 December 2021, 3.50 PM (GMT+10), Sydney, Eastern Australia.

SM1 Daily Technical Chart, Data Source: REFINITIV 

Wellnex Life Limited

WNX Details

Wellnex Life Limited (ASX: WNX) provides health and wellness products that include vitamin and dietary supplements. It caters to customers in Australia. WNX is an ASX listed on March 15, 2017.

Update on Recent Orders: As per the announcement on 17^th December 2021, WNX received a purchase order for A$1.6 million of liquid paracetamol products with an additional order for the Wagner Liquigesic brand. Its Wakey Wakey and the Iron Company brands to reach shelves of major retailers -Coles and Woolworths by January 2022 and March 2022, respectively. The company plans to reach its products in 1,200 retail stores.

Coalitions and Pact: On 14^th December 2021, WNX launched the Pharmacy Own brand and entered into supply a pact with CH2 to launch 20 products in the first 12 months covering CH2’s wide network of 2,500 pharmacies. In the recent period, WNX formed a JV with Australian Diary Nutritionals to produce an organic A2 protein infant formula range of products using 100% local milk. The JV is likely to kick start in January 2022 and the first products is slated to be launched in H1FY22.

Q1FY22 Update:

• Receipts from customers for the quarter ending September 2021 reached A$4.85 million and posted cash outflows of A$319.0k from operations that include one-off expenses towards the acquisition of Brand Solutions Australia.
• It had launched three brands in November 2021 in pharmacy and grocery stores.
• WNX closed the quarter with a cash balance of A$3.6 million and ~A$4 million in inventory. It had repaid A$2 million outstanding convertible notes. The company believes that this will help to raise convertible notes of A$3.7 million on negotiated terms.

Inventory Turnover Trend (Source: Analysis by Kalkine Group)

Key Risks: WNX’s health supplement business is highly competitive, and the company has to heavily incentivise pharmacies and retailers to distribute its products. Changing customer preferences and lifestyle may affect the product offtake. Due to sizeable losses, the company must rely on external funding to support its growth capex.

Outlook: The company is likely to commercialise its organic infant formula-based products from January 2022 and plans to launch two new products under the range. WNX will receive a royalty from Australian Diary Nutritionals for sales to overseas through e-commerce.

Stock Recommendation: Over the last three months, the stock has corrected by ~17.50% and it is trading below to the average of the 52-week low-high band of $0.082-$0.170, indicating an accumulation opportunity. On a TTM basis, the stock has been trading at a price-to-sales multiple of 23.27x, lower than the industry average of 50.95x (Pharmacies). This implies the stock is undervalued at the current price level. Considering the ambitious Pharmacy Own rollout plan, recent purchase orders, coalitions with major retailers and pharmacies in Australia, decent cash balance, valuation based on TTM, current trading levels, and key associated business risks, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.099 as on 17 December 2021, 3.50 PM (GMT+10), Sydney, Eastern Australia.

WNX Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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