Synlait Milk Limited

SM1 Details

Update on Canterbury Flooding: Synlait Milk Limited (ASX: SM1) engages in manufacturing and commercialisation of dairy products and nutritional products such as butter, ice cream, milk powder, infant and adult nutritional powders in China, rest of Asia, the Middle East, Africa, New Zealand, Australia, and internationally. As per a recent announcement, the company has been impacted in operational activity and famer supplies due to heavy rainfall, which resulted in severe flooding in the region. This caused significant challenges to farmers and suppliers in collection of milk due to road closures, but the company confirms that it will not have material impact on its FY21 production plans or guidance outlook.

FY21 Guidance Update:

• The company is expecting shipping delays which could impact the sales of some ingredient products, expected to materialise post FY21 balance date.
• The company is estimating net profit after tax between NZ$20 million to NZ$30 million in FY21.
• Synlait is focused to adopt a more conservative approach to year-end inventory volumes and valuation.

The company’s CFO, Angela Dixon has recently resigned, and General Manager Supply Chain Rob Stowell of the company will now serve as interim CFO.

H1FY21 Financial Performance:

• The company has recorded an increase in its revenue by ~19% to NZ$664.2 million in H1FY21, compared to NZ$559.28 in H1FY20.
• Synlait has reported a downfall in NPAT by ~76% to NZ$6.4 million in H1FY21 against NZ$26.19 million in H1FY20 due to significant uncertainty, volatility, and several headwinds during the period.
• The company’s Lactoferrin production has increased by ~16% to 13.6 MT.

Revenue Trend (Source: Analysis by Kalkine Group)

Outlook: For company’s effective operation, Syndicate ensure for appropriate funding for FY22 as it does not intend to undertake a capital raising. The management ensured to deliver a much-improved financial performance in FY22. Synlait will release its FY21 results on Monday 27 September with update of FY21-22 forecast.

Key Risks:

• Impact of COVID-19 pandemic- The company has been facing significant challenges in their operational activity like supply delays, costs and production that impacted the financial performance, and uncertainty still prevails in near-term future. Therefore, the company should control the cost and initiate some strategy to mitigate the impact.
• Climatic Risk- The company is exposed to climatic risk, recently the company has been impacted in milk collection and logistic delays due to road closure.

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: As per a recent announcement, the company has increased its forecast for FY20-21 season base milk price to NZ$7.55 kgMS from NZ$7.20 kgMS and for FY21-22 season it is NZ$8.00 kgMS due to its strong demand from China. The stock of SM1 is trading below its average 52-weeks' levels of $2.640-$6.770. The stock of SM1 gave a positive return of ~11.72% in the past three months and a negative return of ~29.15% in the past nine months. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount to its peer average EV/Sales (NTM Trading multiple), considering the impact of COVID-19 pandemic and climatic risk. For this purpose, we have taken peers such as Bubs Australia Ltd (ASX: BUB), Bega Cheese Ltd (ASX: BGA), Beston Global Food Company Ltd (ASX: BFC), to name a few. Considering the current trading levels and expected upside in valuation levels, uptick in revenue in difficult operating conditions, expected economic recovery, decrease in debt-to-equity ratio and the key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the current market price of $3.620 as on 19 July 2021, 03:54 PM (GMT+10), Sydney, Eastern Australia.

SM1 Daily Technical Chart, Data Source: REFINITIV

NAOS Emerging Opportunities Company Limited

NCC Details

Business Update: NAOS Emerging Opportunities Company Limited (ASX: NCC) is an asset management company that conducts in-house research, employs short/long term strategy and invests in public equity markets of Australia. As per a recent announcement, the company’s director, Sebastian Evans has undergone a change of interest and acquired total of 50,000 ordinary shares in the company.

Q3FY21 Financial Performance:

• The company has recorded a strong performance across all NAOS LICs with NCC at ~3.7%, NSC at ~17.5% and NAC at ~9.8%.
• The company is focused to invest in business that operates with structural tailwind.
• The management believed that several core investments across all LICs were significantly undervalued and catalyst rich.
• Due to rise in government bond yields it has driven a significant momentum shift in growth and value stocks.

Revenue & Profit/Loss Trend (Source: Analysis by Kalkine Group)

Outlook: The management is focused on to make changes where they believe the management has executed poorly and/or are not making sound capital allocation decisions which allow shareholder capital to compound at a satisfactory rate. The company has strategized for long-term performance and has maintained an adequate reserve balance.

Key Risks: The company’s line of business makes it prone to macro-economic risks like the present ongoing COVID-19 pandemic.

Stock Recommendation: As per a recent announcement, the company has updated monthly investment and NTA where the Pre-Tax NTA is $1.23 at a share price of $1.035 with 7% of fully franked dividend yield as of 30 June 2021. The stock of NCC is trading above its average 52-weeks' levels of $0.815-$1.165. The stock of NCC gave a positive return of ~30.95% in the past one year and a positive return of ~7.31% in the past one month. Considering the current trading levels, recent rally in the stock price, volatility in market, uncertainty due to COVID-19 pandemic, due diligence risk and the key risks associated with the business, we recommend a 'Sell' rating on the stock at the current market price of $1.100 as on 19 July 2021.

NCC 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 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 the 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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