Synlait says big spending days are behind it as it focuses on making money

Tuesday, 10 November 2020

Synlait's original factory is at Dunsandel in Canterbury.

Synlait Milk has spent up big over the past couple of years, investing $555 million to diversify its products, manufacturing sites and customers, and it is now turning its focus to making money from that outlay.

The Canterbury-based manufacturer spent $280m on a new factory at Pokeno, $125m on a new liquid plant at Dunsandel and $150m to buy cheese companies Talbot Forest Cheese and Dairyworks. On Tuesday it announced plans to sell $200m of shares to reduce debt and fund a further $70m of investment to fit out its plant for a new customer.

“We have been spending a lot of money over the past two to three years,” said chief executive Leon Clement. “If you add it all up, it is a significant wallop of cash.

“We are still an ambitious company and we want to continue to do that but it is time for us to focus and deliver on the investments that we have made.”

* Synlait doubles down on Dairyworks amid global coronavirus pandemic

Synlait expanded its product range beyond infant formula to include liquid milk and cream, cheese and plant-based milk.

* Synlait buys dairy farm next to Canterbury factory for $25.7m

* More than $400m of Synlait Milk developments on track

* Synlait Pokeno factory on track for completion this spring

Synlait chief executive Leon Clement says it is time to start delivering on its investments.

Last year, Synlait’s profit fell 9 per cent to $75.2 million as financing and manufacturing costs rose while it chased growth. On Tuesday, the company said profit this year was expected to be “at or slightly below” that level.

Clement said the business was capital intensive, having to invest “a fair chunk of cash” up front in expensive pieces of stainless steel and land. Still, he felt the investment was necessary to reduce the company’s risks and enable future growth.

“We were a bit of a one-trick pony and we wanted to get on with building a more sustainable business that was a bit more resilient to shocks of either one site exposure, single customer exposure, single category or market exposure.

“We have been in a phase that has been balancing the risks of addressing that concentration and diversifying.

“We have been through what I would call a ‘build it’ phase and now we are in a ‘fill it’ phase.”

There were no big investments planned for the foreseeable future, he said.

Synlait has expanded beyond its original factory at Dunsandel to Auckland and Pokeno.

The company had “doubled down” on itself over the past two years, spending the equivalent of its net assets on investments, but there was no urgency to continue at that rate, he said.

“I don't think there is remaining significant exposure for us – we have got ahead of that risk and I know that our shareholders, and certainly our board, want to see us start to deliver on the investments that we have made.”

Since listing on the NZX in July 2013, Synlait has been forgoing dividend payments and using its cash to invest in factories and new products for future growth. Still, Clement signalled dividend payments were not imminent.

“Whilst we are moving from a ‘build it’ to ‘fill it’ phase, there is still a lot of work to do to start to bring stability to those earnings streams before we could sort of move into potentially considering paying dividends but I would not rule it out of Synlait's future,” he said.

A2 Milk is a key customer for Synlait but, in recent times, the specialist milk marketer has broadened its supply and manufacturing base to also include Fonterra and has been looking at investing in its own production by buying a controlling stake in Mataura Valley Milk in Southland.

Synlait’s exclusive contract to supply A2’s infant formula for Australia, New Zealand and China expires in 2025 but Clement said he was confident that while the relationship might evolve and change, their strategic partnership would continue.

“I am really confident, as they have messaged as well, that we will remain a core part of their supply partnership going forward.

“We have got a very strong strategic partnership, and we have had exclusive contracts roll over in the past and been renewed, and I expect that would continue despite the fact they are complementing their supply options.”

Last week, Synlait announced that it had signed up a new multinational customer for plant-based milk products and Clement said this high-growth area would remain an investment focus for the company.

“I think it has got great potential,” he said. “It comes back to how we think about milk. We see ourselves as believing in the nutritional vector of milk, not necessarily just bovine milk.

“We are seeing a food revolution out there in the world around the choices that consumers are making and we don't think it is appropriate to put our heads in the sand on that.”

Synlait shares were halted from trading on Monday afternoon while the company completed a bookbuild for its $180m share sale to institutional and larger investors.

On Wednesday, the company said the placement was strongly supported, with bids “well in excess” of the amount sought. The shares were sold at $5.10 each, a 14 per cent discount to the last traded price. Synlait will raise a further $20m from selling shares to smaller investors.

The shares fell 2.2 per cent to $5.80 shortly after they resumed trading just before 1pm on Wednesday.