Synlait Milk Limited

SM1 Details

Update on the Dunsandel Facility Operation: Synlait Milk Limited (ASX: SM1) is involved in dairy manufacturing and sells milk powder and milk-powder related products. As of 4 June 2021, the market capitalisation of SM1 stood at ~$679.78 million. On 1 June 2021, the company announced the update on its Dunsandel facility operations pertaining to heavy rainfall causing floods in Cantebury. It has deployed a small team at the facility for operations in the past three days to ensure the deliveries and security of the facility. It informed the restoration of onsite operations from 1 June 2021. SM1 confirmed that there will be no material impact of this event on its guidance outlook or production plan for FY21. SM1 is prioritising focus on supporting impacted farmer suppliers to control the situation.

Increased Forecasted Milk Price: On 31 May 2021, SM1 announced an increase in the estimated base milk price from $7.20 kgMS to $7.55 kgMS for the FY20/21 season. The opening price estimate for the 2021 / 2022 season is $8.00 kgMS. SM1 is monitoring movements and inform the farmer suppliers with relevant updates. It will confirm the final milk price for the 2020 / 2021 season as it releases its FY21 results on 27 September. SM1 will also update its 2021 / 2022 season estimates at the same time.

Resignation of CFO: On 14 May 2021, SM1 announced that the resignation of its CFO Angela Dixon. Mr Rob Stowell, General Manager Supply Chain, will step in as the company’s interim CFO.

1HFY21 Key Takeaways: The company reported NZ$664.18 million revenue in 1HFY21, up by 19% YoY. Its NPAT was down by 76% YoY to NZ$6.4 million in 1HFY21. SM1 registered lower sales of 18,085 mt for 1HFY21 for its consumer-packaged infant formula, down by 16% YoY. It held a cash and cash equivalents balance of NZ$9.133 million as of 31 January 2021.

Revenue & Net Income from 1HFY19-1HFY21; (Analysis by Kalkine Group)

Key Risks: The company faces shipping delays, consumer behaviour and milk prices changes, inventory management issues, and adequate finance to scale up operations. It is exposed to floods and heavy rainfall, thus damaging its farm network and operations facility.  

Outlook: SM1 has estimated a net profit after tax loss between $20-$30 million in FY21. It previously announced a broadly break-even FY21 NPAT result. SM1 is working closely with the bank for suitable funding for FY22 and intends to avoid a capital raising exercise. SM1 plans to launch new products in the next twelve months for a business to business and business to consumer and later introduce a branded consumer product and formulated liquid for infants.

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 gave a negative return of 35.84% in the past three months and a negative return of 43.33% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $2.640-$7.110. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount than its peer median, considering its fall in EBITDA, lower sales, and production for 1HFY21. For this purpose, we have taken peers like Bega Cheese Limited (ASX: BGA), Beston Global Food Company Limited (ASX: BUB), Ridley Corporation Limited (ASX: RIC) and others. Considering the current trading levels, decent results of 1HFY21, launch plans for new products, higher cash receipts from customers in 1HFY21, valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $3.240, up by 4.180% on 4 June 2021.

SM1 Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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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