Synlait Milk Limited

SM1 Details

Unique Partnership: Working in a dairy processing area, Synlait Milk Limited (ASX: SM1) deals in manufacturing of nutritional solutions, value added products and specialty ingredients. Its products include infant and adult nutritional formulations, functional food ingredients and specialized products. Recently, a unique partnership between SM1, Danone (science provider AgResearch) and the Ministry for Primary Industries’ (MPI) Sustainable Food and Fibre Futures Fund have been incorporated. This partnership will incur research, and then measure and provide farmers the tools to improve soil health.

FY21 Performance Highlights:

• The company’s total revenue marginally increased to ~NZ$1,367 million in FY21 versus ~NZ$1,302 million in FY20.
• The rapidly changing infant nutrition market in China and a2M company’s large forecast volume (infant formula) reduction affected SM1’s December month and after straight nine years of profitability, SM1 reported a net loss of ~NZ$28.5 million.
• The company closed its books with a net debt of ~NZ$479.4 million and a cash balance of ~NZ$16.02 million at the end of 30^th June 2021 versus ~NZ$5.88 million at the end of FY20.

Key Financials Highlight (Source: Analysis by Kalkine Group)

Key Risks:

• Due to the Bullwhip effect caused by the a2M Milk Company’s large forecast volume (infant formula) reduction, sudden switch to ingredients production and shipping delays, made it difficult for SM1 to gain new customers and achieve the usual ingredients premium. Thereby, it increased SM1’s over dependency on one product, one customer and one market.
• The company is vulnerable to the risks associated with the impacts of COVID-19 and the new variant Omicron and affects the employees, operational functions, and thereby profitability.

Outlook: The company remains on track to efficiently execute the strategy planned in last quarter of FY21 and some governance changes to shareholders. With the CEO appointment, SM1 plans to reset its banking arrangements, release cash from inventory, and improve working capital management. The aim is to provide a robust profitability in FY22 & FY23. In FY22, SM1 expects an off gain of ~NZ$17 million from the sales and leaseback of the land and building in Auckland.

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 the company has been corrected by ~8.57% in the past six months. Currently, the stock is trading below the average of its 52-week low and high levels of $2.64 and $4.67, respectively. The stock has been valued using the EV/Sales based relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). After considering the expected cyclical effect of Omicron COVID-19, commodity price fluctuations and FY21 losses, the company can trade at a slight discount to its peers. For the purpose of its valuation, peers like Tassal Group Ltd (ASX: TGR), Food Revolution Group Ltd (ASX: FOD), Beston Global Food Company Ltd (ASX: BFC), and others have been considered. Considering the working capital management changes in future, reducing debt levels, current trading levels, indicative upside in the valuation, rise in revenues, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the closing market price of $3.200, down by ~0.929%, as on 11 January 2022. 

SM1 Daily Technical Chart, Data Source: REFINITIV

Noumi Limited (ASX: NOU)

Earlier known as Freedom Foods Group Limited, NOU works in the FMCG sector and manufactures dairy and plant-based nutritional products, beverages and ingredients related to the health and fitness industries. Its market capitalisation stood at AUD 105.30 million as of 11^th January 2022.

Financial & Operational Updates – On 24^th December 2021, NOU released the intent of not issuing the second tranche of convertible notes in the month of December 2021, and the following update will be released once the long-term agreement is exchanged with Blue Diamond Growers. As per its 17^th November 2021 announcement, the license agreement dispute related to manufacturing and distribution of Almond Breeze products among NOU and Blue Diamond settled as follows:

• Blue Diamond will receive ~US$25 million from NOU, where ~US$17 million will be given within 20 business days immediately after the signing of the agreement.
• Instalments of ~US$4.5 million for four years starting from 1^st September 2022 of totalling ~US$18 million, supported by bank guarantee.

As per its Quarterly Report released on 29 October 2021, due to a regional outbreak leading to staff shortage in Shepparton, Victoria, the production got hampered for two weeks in the 1QFY22. The company reported softer Q-o-Q results, with a decrease of ~5.5% Q-o-Q in total revenue to ~AU$128.9 million. NOU’s Dairy and Nutritional’s revenue and plant-based beverages revenue was reduced on a Q-o-Q basis by ~8.2% and ~0.6%, respectively. On the other hand, Specialty Seafoods revenue increased by ~46.4% Q-o-Q.

NOU’s net losses for the FY21 decreased by ~72% Y-o-Y to ~AU$38.8 million. For its first quarter, the sales receipts were reported as AU$127.21 million and closed 1QFY22 with a cash balance of ~AU$9.76 million.

Key Risks:

• COVID-19: The company is vulnerable to the COVID-19 and Omicron’s lockdowns across all geographies, which might affect employee’s availability and can lead to a shortage in the workforce, thereby hampering its operations.
• Supply Chain Disruptions: Due to COVID-19 and other factors, the company might face delays in domestic and international shipping and cause problems in functional efficiencies.

Technical Analysis: On a daily chart, NOU's prices are hovering nearby 21-period SMA and have started to gain an upside momentum after making a new 52-week low of AUD 0.360, indicating the possibility of an upside reversal hereon. The RSI (14-period) has recovered from oversold levels and is placed in a mid-range at ~43.691. Now an immediate support level for the stock is placed at AUD 0.34 while the resistance level is at AUD 0.43.

After considering its 1QFY22 cash receipts, current trading levels and an intent to resolve the legal suit, the investors with a high-risk appetite might consider a ‘Speculative Buy’ position, incorporating the support and resistance as one of the tools while analysing the investment opportunity. The stock was analysed as per the closing price of AU$0.380, as of 11^th January 2022. However, the risk levels are extremely high in view of the OMICRON’s disruptions, production capacity and sales related to its products.

Daily Technical Chart – NOU

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 is 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.