Synlait Milk Limited

SM1 Details

Recent Business Updates: Synlait Milk Limited (ASX: SM1) is engaged in manufacturing, packaging, and commercialising dairy and nutritional products.

• 28 January 2022: SM1 increased its estimation for base milk price for 2021/2022 season to NZ$9.25/kgMS from NZ$8.00/kgMS, driven by surging production costs and benefiting from weakening of New Zealand dollar against USD.
• 25 January 2022: Chris France, Director of Strategy & Business Transformation, has resigned from SM1. He has played a substantial role in developing SM1’s strategy and processed multiple technology projects.
• 24 January 2022: SM1 confirms the appointment of John Penno and Grant Watson to commence their rols as Chair and CEO of SM1, respectively.

FY21 Financial Update

• Operating Metrics: In FY21, revenue increased by 5% while NPAT for the period stood at a loss of NZ$28.5 million. Primarily responsible factors for the drained bottom-line are a NZ$55.7 million decrease in infant volumes, a $33.3 million downtick in stock balancing, and a NZ$20.5 million slippage in ingredient performance.
• Cash Flow Status: The period’s operating cash flows shredded to NZ$15.9 million, down by NZ$87.9 million, owing to curtailed volumes in consumer-packaged infant formula and inventories exceeding target levels by circa 13,000MT.
• Financial Position: Net debt shrunk to NZ$479.4 million, primarily attributed to a NZ$196.1 million equity raise, partially offset by NZ$136.8 million net capex. Investment activities declined to NZ$86.4 million following the Dairyworks and Talbot Forest Cheese acquisitions in FY20.

Operating Metrics FY21, Analysis by Kalkine Group

Key Risks and Challenges: Trade restrictions, high dependency, and geopolitical tensions with China may derail growth prospects for SM1. Supply chain disruptions and rising production costs may pose an unfavourable impact on margins.

Outlook: The total debt/EBITDA covenant limit stands at 4.5x for FY22, and SM1 targets to remain below 4.0x. The working capital facility is expected to renew by 1 October 2022, and the revolving facility will be extended for two years. SM1 expects increased ingredients margin, inventory sell-down, improved Dairyworks contribution, coupled with and benefits from sale and leaseback of Synlait 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 SM1 gave a negative return of ~34.228% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $2.640 - $4.450. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at some discount compared to its peer’s EV/Sales average, considering substantial reliance on Chinese market and associated supply chain constraints. For valuation purposes, peers like Ridley Corporation Ltd (ASX: RIC), Elders Ltd (ASX: ELD), Tassal Group Ltd (ASX: TGR) and others have been considered. Given the high expectations from margin performance and Dairyworks’ contribution, decent debt levels, current volatility sought in the dairy industry, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a ‘Speculative Buy’ recommendation on the stock at the current market price of $2.940, as of 31 January 2022, at 11:25 AM (GMT+10), Sydney, Eastern Australia..

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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