Synlait targets infant formula market

Dairy company seeks to raise $75 million through IPO for new projects

Half of Synlait Milk's revenue comes from Asia and about half of that comes from China. Picture / Brett Walker
Half of Synlait Milk's revenue comes from Asia and about half of that comes from China. Picture / Brett Walker

Infant formula is clearly where the action is on the international dairy markets.

Up until now, about 92 per cent of Synlait Milk's earnings have come from the ingredients side of the business - specialised wholemilk and skim-milk powders - with just 8 per cent coming from the nutritional products and infant formula.

While Synlait Milk is gearing up its business to take advantage of the sharp increase in demand for formula, the company is not getting too carried away.

Synlait Milk chief executive John Penno said much of the hype surrounding infant formula, including reports of product being smuggled into China, showed the market had gone "a bit crazy".

"What has happened is that you have had this huge demand growth in China ... over the last five years as they have gone from 70 per cent local production to 70 per cent based on imports," Penno said.

The market dynamics surrounding China are compelling but Penno said Synlait, which is planning an initial public offer and sharemarket listing for next month, is wary of putting all its eggs in one basket.

China delivers 20 million babies a year. Urbanisation is taking place on a large scale and there is pressure on Chinese mothers to rejoin the workforce soon after giving birth, often leaving the grandparents to do the child minding - hence the increased demand for formula.

It doesn't stop there.

Children aged three to five years often carry on consuming formulated milk products in preference to the domestic fresh milk supply.

Penno said the China infant formula story was exciting, but that Synlait Milk was taking a measured approach as it sought to expand its presence in infant formula.

As its stands, half of Synlait Milk's revenue comes from Asia and about half of that comes from China. He said China's role in making up 25 per cent of revenue was by design.

"We don't want to become too China-centric," he said.

However, Synlait Milk does lean more towards the emerging markets, such as North Africa and the Middle East.

Unlike Fonterra, it doesn't have a presence in Europe or in the Americas. Penno said the company's focus was to build the infant formula business "as quickly as we can" over the next five years.

Synlait Milk is seeking to raise $75 million in new capital through the issue of shares in a $2.05 to $2.65 range.

The initial public offer will include a $45 million share selldown. Penno said the fresh capital would go towards projects over the next three years worth a total of $183 million, which he said would also be funded by debt and operating earnings.

China's Bright Dairy will retain four seats on the eight-member Synlait Milk board, despite the likelihood it will lose its majority ownership status because of the ownership-diluting effects of the offer.

Bright Dairy's ownership is likely to fall to about 40 per cent from 51 per cent.

Another cornerstone shareholder, Japan's Mitsui, will take up its offer to maintain its holding at 22.5 per cent.

The offer documents point to a net profit of $10.84 million for the current year ending July 31, up from $9.31 million in 2012. The documents point to a $19.67 million net profit for 2014.

Much of the projected increase in earnings will come from a lower interest bill resulting from proceeds of the IPO - down to a forecast $4.76 million in 2014 from $12.43 million in the current July year.

The company expects to list on the NZX on July 23.


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