Synlait profits will take years to recover after 'dismal' 2021, analysts say

Tuesday, 25 May 2021

Synlait is facing shipping delays, lower prices and concerns around its inventory.

Milk processor Synlait is expected to take years to recover as it heads for its first annual loss since listing on the NZX in 2013.

The company on Monday warned it expected to post a full-year loss of between $20 million and $30m in the year to the end of July. It previously said in March that it expected to break even this year.

Synlait co-founder John Penno has returned as chief executive, replacing Leon Clement, after demand weakened from the company’s major customer The a2 Milk Company because of disruptions to sales caused by the Covid-19 pandemic. Penno said Synlait faced shipping delays, lower prices and concerns around its inventory.

The hit to sales came after Synlait increased its debt to diversify its products, manufacturing sites and customers to reduce its reliance on A2 and set the stage for future growth.

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The 2021 financial year “has been a dismal year with a plethora of (now) well-publicised issues, amplified by one-offs, the rapid pace of change, and timing (at the end of its expansionary capex phase),” Forsyth Barr analysts Chelsea Leadbetter and Matt Montgomerie said in a research note published on Tuesday.

Synlait reported a $75.2m profit last year and the Forsyth Barr analysts expect the company to post a loss of $23.9m this year.

They see “some recovery” next year with a profit of $41.7m, and a higher profit of $64.7m in the 2023 year, albeit still below the 2020, 2019, and 2018 profits.

The analysts note that while Synlait’s guidance seems conservative, the outlook is uncertain.

“The path from here is still no clearer, with a high margin of error in earnings forecasts, not helped by low external visibility on key drivers, a volatile backdrop and high leverage,” the analysts said.

They expect Synlait’s net debt to remain stable at $524m this year, reducing to $456m next year and $391m in 2023.

Synlait listed on the NZX in July 2013 at $2.20 a share and have traded between $2.04 and $13.53. They closed down 1.6 per cent on Tuesday at $3.

The company has been forgoing dividend payments and using its cash to invest in factories and products for future growth and Forsyth Barr had no dividend payments pencilled in its forecast period over the next three years.