Synlait Milk Limited

¹Ratios such as P/E, EPS, ADY are on Trailing Twelve-Month basis, which are subject to change based on certain factors such as company performance, and stock price changes.

²ROE has been taken for the Half-Year Ending January 2021.

SM1 Details

This report is an updated version of the report published on the 17 June 2022 at 3:55 PM GMT.

Business Update Key and Financial Metrics: Synlait Milk Limited (ASX: SM1) is a milk processing and B2B supplier of dairy products, infant formula, and Lactoferrin. The company exports its products across the world to Asia, Middle East, Africa, and other regions.

• The company’s Legal Risk & Governance director has resigned from the position to take up another opportunity outside SM1.
• SM1 has reduced its expected base milk price for the FY22 season to $9.30 per kgMS, down from $9.60 kgMS. While the opening forecast for FY23 is $9.00 per kgMS.

Half Year Result Update:

• The ingredient volumes and surge in commodity price drove revenue up 19% to $790.6 million in H1FY22, which, is the best volume and revenue on record in its history.
• The reported gross margin increased by 16% in H1FY22 due to considerable cost savings in the ingredients business and the Lactoferrin business resiliency.

Half-yearly revenue update (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to foreign exchange risk, and risk from Covid-19 could lead to some disruption in its growth prospects. The volatility in dairy commodity prices also increases the firm's risk.   

Outlook: SM1 expects further increase in NPAT in FY22 on the back of better management of its ingredient business, growth in infant base powder volume, increasing contribution from its Lactoferrin and Consumer Food business, and expected cost savings..

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

Source: 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: The stock of SM1 is trading below its 52-week low-high average of $2.710-3.750, respectively. The stock went down by ~6.07% in the past three months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount to its peers, considering the rise in the Covid-19 case in China, volatility in dairy commodity prices, and supply chain constraints. For this valuation, a few peers like A2 Milk Company Ltd (ASX: A2M), Bega Cheese Ltd (ASX: BGA), Inghams Group Ltd (ASX: ING), and others have been considered. Considering the expected growth prospect for FY22, increase in infant base powder volumes, cost-saving, current trading levels, upside indicated in valuations, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.800, as of 17^th June 2022, at 12:41 PM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

SM1 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 for 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 a 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 price.

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